Tech Index Breaks Dotcom Era Record: ETFs To Buy

The US technology sector surged past its dotcom era peak owing to improving economic sentiment and earnings outlook. It rose to a 17-year high.

The S&P 500 Information Technology index recorded a ninth-straight high as it closed at 992.29 on July 19, 2017, past its previous high of 988.49 recorded in March 2000.

Although the rise of the internet led to a rally in tech stocks in early 2000, the failure of some of the biggest names in the industry back then ultimately led to a sell-off of 80%.

However, a lot has changed in the last seventeen years. Tech stocks witnessed a rebound and now operate in a completely different environment with totally unique business models.

So, why exactly are tech stocks so expensive and why do some loss-making companies have such high valuations? The answer to this question is simple, convenience.

Internet and the smartphones have become an indispensible part of everyone’s lives and it is difficult to imagine life without them. Be it home entertainment, getting essentials delivered at your doorstep or staying connected with the world on the go, consumers demand convenience. The tech sector aims at innovating and focusing on just that.

The tech index has grown around 23% so far this year, led by rallies in major tech companies, compared to the broader market’s (SPDR S&P 500 (MX:SPY) ETF- (AX:SPY) 10.5% return. For arguments sake, Apple (NASDAQ:AAPL) has increased 30.4% so far this year, while Facebook (NASDAQ:FB) is up around 42.7% and Microsoft (NASDAQ:MSFT) 18.9% this year (read: Is the New FANG-Themed ETF Well Timed?).

However, the valuations now differ a lot from that of the year 2000. Per Bloomberg data, reported in a Financial Times article, tech stocks are trading at 19.4 times 2017 earnings compared with S&P 500 trading at 19 times. This is in stark contrast with a 73 times multiple for the tech sector in 2000 (read: How to Build a Winning ETF Portfolio for Second-Half 2017).

In the current scenario, we believe it is prudent to discuss the following ETFs that focus on providing exposure to the tech sector (see all Technology ETFs here).

Technology Select Sector SPDR Fund XLK

XLK is a relatively cheaper bet on the technology sector. This fund has AUM of $16.91 billion and charges a fee of 14 basis points a year. From a sector look, Software, Internet Software and Services and Technology Hardware Storage & Peripherals have the highest exposure to the fund, with 20.11%, 18.85% and 17.06% allocation, respectively (as of June 30, 2017). Apple Inc, Microsoft Corp and Facebook Inc are the top three holdings of the fund, with 14.77%, 10.47% and 7.02% allocation, respectively (as of June 30, 2017). The fund has returned 26.03% in the last one year and 18.73% year to date (as of July 19, 2017). XLK currently has a Zacks ETF Rank of #2 (Buy) with a Medium risk outlook.

iShares U.S. Technology ETF IYW

This fund provides exposure to the U.S. technology sector. It has AUM of $3.63 billion and charges a fee of 44 basis points a year. From a sector look, Software & Services, Technology Hardware & Equipment and Semiconductors & Semiconductor Equipment have the highest exposure to the fund, with 53.85%, 26.84% and 18.08% allocation, respectively (as of July 18, 2017). Apple Inc, Microsoft Corp and Facebook Inc are the top three holdings of the fund, with 17.16%, 12.41% and 8.44% allocation, respectively (as of July 18, 2017). The fund has returned 32.42% in the last one year and 22.54% year to date (as of July 18, 2017). IYW currently has a Zacks ETF Rank of #1 (Strong Buy) with a Medium risk outlook.

Vanguard Information Technology ETF (HN:VGT)

This fund is one of the most popular bets on the technology sector in the U.S. It has AUM of $14 billion and charges a fee of 10 basis points a year. From a sector look, Software and Programming, Internet and Mobile Applications and IT consulting and Data Services have the highest exposure to the fund, with 22%, 20% and 17% allocation, respectively Apple Inc, Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corp are the top three holdings of the fund, with 14.0%, 10.3% and 9.4% allocation, respectively (as of June 30, 2017). The fund has returned 31.50% in the last one year and 22.19% year to date (as of July 19, 2017). VGT currently has a Zacks ETF Rank of #2 with a Medium risk outlook.

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