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Tech ETFs at Risk as Coronavirus Mars IDC IT Spending Outlook

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The coronavirus outbreak has pushed major U.S. indices into the bear territory, ending their extended bull run. In fact, the Dow declined 9.99% on Mar 12, marking the largest single-day percentage decline since the 1987 stock market crash. Declining a respective 9.5% and 9.4% on Mar 12, the S&P 500 and Nasdaq Composite have also entered the bear market  (read: ETF Areas to Mark as Coronavirus Snaps Dow's 11-Year Bull Run).

Coronavirus Hurts IT Spending

It is being feared that the increasing number of infected cases outside mainland China will disrupt the global supply chain and economic activities, leading global economies to recession. In such a scenario, the International Data Corporation (“IDC”) updated Worldwide Black Book Live Edition for February 2020 projects IT spending growth of 4.3% in constant-currency terms for 2020, comparing unfavorably with the January forecast of constant-currency growth of 5%. The current estimates also reflect disappointing outlook for hardware device sales. The upbeat forecasts for IT spending were based on solid personal computer sales observed in fourth-quarter 2019, 5G-driven smartphone upgrade cycle along with recovery in expenditures on infrastructures by service providers. Software and IT services saw increased demand, largely due to digital transformation projects.

IDC also stated that the growth predictions may be further downgraded to 3% in March based on the latest scenario. The market research firm expects corporates to further reduce or postpone their non-essential technology investment plans if the coronavirus crisis extends beyond the second quarter outside China. In such a scenario, corporate spending growth could be as low as 1% (read: Long/Short ETFs to Fight Market Crash).

In this regard, Stephen Minton, vice president of IDC's Customer Insights & Analysis group, said that, “things are moving so quickly that we need to constantly recalibrate our assumptions and expectations, but the pessimistic scenario reflects an IT market in which weaker economic growth translates into weaker business and consumer spending across all technologies over the next few quarters. Things could get worse, but hopefully not."

It is worth noting here that, some major players in the technology sector have already expressed concern about the impact of the coronavirus on their financials. For instance, Microsoft announced that it won't meet its sales forecast for the March quarter due to the virus impact. The "uncertainty related to the public health situation in China” has weighed on Microsoft's Windows and Surface hardware businesses. Going on, Apple issued an earnings warning on Feb 17 stating that the company might not be able to meet its quarterly revenue expectations issued on Jan 28, 2020, hurt by the impact of coronavirus. The virus is likely to thwart the manufacturing of its iPhone and also hit demand in China’s market (read: Coronavirus to Hurt Apple Earnings: Time to Buy These ETFs?).

Against this backdrop investors can take a look at the following ETFs (see all Technology ETFs here):

Technology Select Sector SPDR Fund (XLK - Free Report) — down 17.8% year to date

The fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Technology Select Sector Index (read: Amid the Tech Slump, Internet ETFs Most Resilient to Virus).

AUM: $25.33 billion

Expense Ratio: 13 basis points (bps)

Vanguard Information Technology ETF (VGT - Free Report) — down 19.2%

The fund tracks the performance of a benchmark index that measures the investment return of stocks in the information technology sector (read: Forget Virus Scare, Buy Tech ETFs on the Dip).

AUM: $24.94 billion

Expense Ratio: 10 bps

iShares U.S. Technology ETF (IYW - Free Report) — down 18.7%

The fund provides exposure to U.S. electronics, computer software and hardware, and informational technology companies and tracks the Dow Jones U.S. Technology Capped Index (read: Microsoft Revises Sales Guidance on Coronavirus: ETFs in Focus).

AUM: $4.59 billion

Expense Ratio: 42 bps

Fidelity MSCI Information Technology Index ETF (FTEC - Free Report) — down 19.3%

The fund seeks to provide investment returns that correspond, before fees and expenses, generally to the performance of the MSCI USA IMI Information Technology Index (read: Microsoft's Azure Returns to Growth: 5 ETFs to Buy).

AUM: $3.23 billion

Expense Ratio: 8 bps

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