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Tech Adds Trillion Dollar in Market Cap: 5 Best ETFs YTD

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After being beaten down badly at the end of last year, the technology sector had staged a nice comeback with a trillion dollar rebound in a market capitalization over a span of four months. The sector is outperforming the broad market as the ultra-popular Technology Select Sector SPDR Fund XLK has returned 26.4% so far this year compared with gains of 17% for the broad market fund SPY (read: 5 Sector ETFs That Beat the Market in April).   

We have highlighted some strong reasons for the outperformance:  

Encouraging Trends

Most of the gains came from strong optimism over the deal between the two largest countries to end a year-long trade war as the sector has lot of exposure in China. Additionally, the rapid adoption of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, AI and machine are driving the sector higher. The deployment of 5G (fifth-generation) technology — the next wireless revolution — is creating further opportunities. The wave of mergers and acquisitions is also providing further impetus to the space.

Earnings Bolsters Tech

Apple Inc. (AAPL - Free Report) sparked a rally in the broad sector following its robust second-quarter fiscal 2019 results wherein it topped both earnings and revenue estimates. The iPhone maker also offered an encouraging guidance for the ongoing quarter. Although iPhone sales declined, Apple’s service business segment reached all-time highs and momentum in iPad, and Wearables, Home and Accessories continued to be strong. In fact, Apple recorded the strongest iPad growth in six years (read: Take a Bite of Apple With These ETFs on Solid Earnings).

Additionally, Microsoft MSFT also had a blowout quarter that instilled strong optimism into the sector. The outperformance reflects the company’s success in shifting its business toward Internet-based computing, which includes products such as Office 365, Dynamic 365 and the flagship Azure computing platform. Even the weaker-than-expected results of Alphabet Inc. GOOGL could do little to stop the astounding tech rally.

Solid Fund Flows

Investors are pouring huge amount of money into the tech ETFs despite historically high valuations. According to EPFR Global data cited by Bank of America Merrill Lynch, tech ETFs saw more than $1.3 billion in net inflows in the week ended April 26 led by Invesco QQQ QQQ, Technology Select Sector SPDR fund XLK, and Vanguard Information Technology ETF VGT). Notably, VGT saw the largest weekly inflow ever.

Solid Zacks Rank

The upside to the technology sector is confirmed by a solid Zacks Sector Rank in the top 38% with more than 60% of the industries ranking in the top 37%. This suggests continued outperformance in the sector for the coming months.

Given this, there have been winners in several corners of the broad tech space. Below we have presented five ETFs that have easily crushed XLK from a year-to-date look and are likely to continue their strong performance.

iShares PHLX Semiconductor ETF SOXX – Up 35.4%

This ETF offers exposure to U.S. companies that design, manufacture and distribute semiconductors by tracking the PHLX SOX Semiconductor Sector Index. It holds 30 stocks in its basket with higher concentration on the top firms. The fund has AUM of $1.2 billion and trades in a solid volume of around 735,000 shares. It charges 47 basis points in annual fee and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Semiconductor ETF Tops in April: 5 Stocks Leading the Rally).

Invesco DWA Technology Momentum ETF PTF – Up 33.9%

This fund follows the Dorsey Wright Technology Technical Leaders Index and provides exposure to companies that are showing relative strength (momentum). Holding 39 stocks in the basket, it is well diversified with each constituting less than 6.9% share. The product is illiquid and relatively unpopular with AUM of $172.7 million and average daily volume of 15,000 shares. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

SPDR FactSet Innovative Technology ETF XITK – Up 30.8%

With AUM of $86.3 million, this fund seeks to provide exposure to the most innovative companies with high revenue growth that may provide leading-edge products and services. It follows the FactSet Innovative Technology Index and holds 95 stocks in its basket, with none accounting for more than 1.6% of assets. The product has an expense ratio of 0.45% and trades in average daily volume of 15,000 shares.

First Trust NASDAQ-100 Technology Sector Index Fund QTEC – Up 30.4%

This ETF follows the NASDAQ-100 Technology Sector Index, holding 39 stocks in its basket with each making no more than 3.5% share. It has amassed $2.6 billion in its asset base while trades in average daily volume of 222,000 shares. The fund charges 58 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook (read: Top-Ranked ETF Winners in Dow's Longest Rally in 24 Years).

SPDR S&P Software & Services ETF XSW – Up 30.3%

This fund targets the software and services segment and follows the S&P Software & Services Select Industry Index. It holds 156 stocks in its basket, charging 35 bps in annual fees. XSW has accumulated $243 million and trades in lower volume of 29,000 shares a day on average. It has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: A Spread of Top-Ranked ETFs That Crushed the Market in Q1).

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