Is It Time to Rotate Out of Tech ETFs?

Technology stocks and ETFs have been star performers of this year. The coronavirus outbreak could not take the sheen out of this sector, rather added more to it. 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.

As a result, the demand for clouding computing, video gaming, online payment services as well as shopping and cyber security facilities surged. U.S. technology is the “longest ‘long’ of all-time,” per the findings in Bank of America’s monthly fund manager survey, as quoted on CNBC. As much as 74% of fund managers found U.S. technology and growth to be the “most crowded trade,” — the highest level ever in BofA’s monthly survey.

No wonder, Technology Select Sector SPDR Fund XLK is up 16.5% this year versus the 0.5% dip in the S&P 500 (as of Jul 17, 2020). However, the winning momentum is now losing its intensity. XLK was up only 0.9% last week versus 2.2% gains in the S&P 500 index. Amazon (NASDAQ:AMZN) recorded its fifth consecutive day of losses on Jul 17. Let’s delve a little deeper.

Netflix’s Guidance Hints at Fading Demand for Stay-At-Home Stocks

Netflix (NASDAQ:NFLX), the world's largest video streaming company, disappointed investors with its second-quarter results. While the company beat revenue estimates and reported solid subscriber addition, it missed the earnings estimate and offered weak third-quarter subscriber guidance (read: ETFs to Watch as Netflix Drops on Weak Subscriber Outlook).

Netflix added 10.1 million new subscribers globally in the second quarter, up from 2.7 million additions more than doubled its subscriber growth in the first half of this year compared with 2019, it warned of less growth for the second half of 2020. As such, the company expects to add just 2.5 million global subscribers in Q3, which indicates the diminishing euphoria for stay-at-home stocks (see: all the Technology ETFs here).

Flare-Up in U.S.-China Tensions

It seems a fresh cold war has started between the United States and China. The Trump administration is reportedly mulling over a travel ban to the United States by members of the Chinese Communist Party and their families, per an article on New York Times. The presidential announcement, which is still in draft form, could also authorize the U.S. government to cancel visas of party members.

The flare-up in U.S.-China trade tensions could result in problems for tech stocks. Tech companies that have extensive trade relations with China would be at high risk of falling prey to the U.S.-Sino tensions. The same holds good for semiconductor companies.

Per Morgan Stanley (NYSE:MS) equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are thus exposed to maximum risks on rising tensions.

Sector Appears Little Overvalued

After a stupendous rally, the sector looks overvalued. Forward P/E of the sector stands at 28.68X versus 22.02X of the S&P 500 ETF (IVV). Return-on-Equity stands at 3.71X versus 15.74X possessed by IVV. Return-on-Asset of the Computer & Technology sector stands at 1.86X versus 6.36X of the S&P 500. Return-On-Investment of the sector stands at 3.01X versus 9.77X of IVV.

Against this backdrop, investors should be watchful about the upcoming progression of the technology sector. Some less overvalued ETFs could be tapped amid this scenario. Investors should note that below-mentioned tech ETFs had posted best performances in the space last week, which was downbeat for the sector. It shows investors’ faith in the area even in tough times.

3D Printing ETF PRNT) – Up 4% Last Week; P/E: 23.01X

Defiance Next Gen Connectivity ETF FIVG – Up 1.88% Last Week; P/E: 26.13X

Invesco S&P SmallCap Information Technology ETF PSCT – Up 1.83% Last Week; P/E: 17.01X

ProShares S&P Technology Dividend Aristocrats ETF TDV – Up 1.39% Last Week; P/E: 26.31X

Invesco S&P 500 Equal Weight Technology ETF RYT – Up 1.20% Last Week; P/E: 16.32X

First Trust NASDAQ Technology Dividend Index Fund TDIV – Up 0.87% Last Week; P/E: 18.63X

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Technology Select Sector SPDR ETF (NYSE:XLK): ETF Research Reports

Invesco SP 500 Equal Weight Technology ETF (RYT): ETF Research Reports

Invesco SP SmallCap Information Technology ETF (PSCT): ETF Research Reports

First Trust NASDAQ Technology Dividend ETF (TDIV): ETF Research Reports

Defiance Next Gen Connectivity ETF (FIVG): ETF Research Reports

ProShares SP Technology Dividend Aristocrats ETF (TDV): ETF Research Reports

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