Tech stocks have been investors’ darling this year despite the coronavirus outbreak. In fact, social distancing norms enacted globally to mitigate the spread of the virus compelled people to stay at home, binge on online shopping and work as well as learn from home. This new lifestyle has boosted various corners of the technology sector, ranging from enterprise cloud computing, cyber security, remote communications, video gaming and e-commerce to online payments.
WisdomTree Cloud Computing ETF (WCLD - Free Report) (up 27.4% past month), ProShares Online Retail ETF (ONLN - Free Report) (up 32.4%), iShares Cybersecurity And Tech ETF (IHAK - Free Report) (up 23.2%), ETFMG Video Game Tech ETF (GAMR - Free Report) (up 21.7%) and ETFMG Prime Mobile Payments ETF (IPAY - Free Report) (up 19.9%) –have all beaten the S&P 500 (up 19.9%) in the past month.
However, things took a turn, causing a steep slump in tech stocks on Apr 21. Overvaluation concerns after a rally in difficult times and President Trump’s plan to suspend immigration to the United States can be held responsible for the latest slump. Technology Select Sector SPDR Fund (XLK - Free Report) lost about 4.2% on Apr 21.
Behind the Slump
President Donald Trump’s forewarning of a temporary suspension of immigration due to virus spread has probably dealt a blow to the tech stocks. The U.S. tech sector is heavily reliant on immigrants. India and China now form a considerable segment of the new working population, along with Mexico. According to Pew Research Center, more than one million immigrants arrive in the United States each year, although the trend has fallen in recent years, as quoted on BBC.
“According to Pew Research Center, almost half of immigrants live in just three states - New York, Texas and California, home of Silicon Valley, where tech giants such as Google, Facebook and Cisco are based,” BBC article specified. So, together with many analysts, we believe that Trump’s immigration ban will impede tech companies’ ability to employ global talent (especially from Asian countries like India) at a relatively competitive price.
If this was not enough, investors have now started to focus on corporate earnings. Any downbeat performance from tech bellwethers (those have been deemed to have survived the coronavirus blow past month) will likely be punished. Notably, Netflix (NFLX - Free Report) – one of the apparent winners amid the outbreak – missed earnings expectations. Also, International Business Machines (IBM - Free Report) that reported after the closing bell on Apr 20, lagged revenue estimates (read: Is It the Right time to Buy Netflix ETFs?).
Mega cloud owners like Amazon (AMZN - Free Report) and Microsoft (MSFT - Free Report) are likely to report on Apr 30 and Apr 29, respectively. Both Amazon and Microsoft carry a Zacks Rank #3 (Hold) and have a negative Earnings ESP of 1.67% and 1.42%, respectively. Negative ESP suggests that analysts have recently become slightly bearish on the company's upcoming earnings prospects.
So, overvaluation issues are likely to bother the space intermittently. Trump’s ban and any earnings underperformance may hurt the ones that have been leaders lately. But the huge long-term prospects for cutting-edge technology demands tech stocks in investors’ portfolio.
Low P/E ETFs in Focus
Below we highlight a few tech ETFs that have low P/E ratios in the space. These ETFs have lower P/E than the largest tech ETF XLK (21.06x).
ProShares S&P Technology Dividend Aristocrats ETF TDV – P/E 17.90x
The ETF focuses on the S&P Technology Dividend Aristocrats — well-established, technology companies that have consistently raised their dividends for at least seven years. The fund lost 3.3% on Apr 21. It yields 1.85% annually, beating the benchmark U.S. treasury yield 0.58% annually.
iShares Cybersecurity and Tech ETF (IHAK - Free Report) – P/E 17.59x
The fund has access to companies at the forefront of cybersecurity innovation. It lost about 3.4% on the day.
Tortoise Digital Payments Infrastructure Fund (TPAY - Free Report) – P/E 19.38x
The fund invests in companies that have the potential to benefit from the transitioning of traditional cash payments into digital payments. It lost 3% on Apr 21.
SPDR S&P Semiconductor ETF (XSD - Free Report) – P/E 20.55x
This semiconductor ETF looks to gain ahead as some earnings have come in better than expected. The fund however lost 4.21% on Apr 21.
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