For all the talk about the technology sector’s vulnerability to the U.S./China trade war — and that assessment is credible — the group hasn’t been as bad as some investors are led to believe. In August, a rough month for equities at the hands of trade tensions, the tech-heavy Nasdaq-100 Index lost 1.4% while the Technology Select Sector SPDR (NYSEARCA:XLK), the largest tech ETF, was lower by 1%.
Obviously, those are not numbers to write home about, but they speak to the point that tech ETFs have not been as awful as some investors have been programmed to believe. Plus, there are positive signs emerging, such as Apple (NASDAQ:AAPL) tapping debt markets for $7 billion and analysts waxing bullish about that stock, Intel (NASDAQ:INTC) and other big-name tech fare.
Of course, relying on resolution to the trade spat to fuel tech ETFs can be a volatile bet. As volatile as, say, President Donald Trump’s Twitter fingers. And all of this is ignoring the headline risk of government regulation stepping into some of the biggest players.
Yes, tech ETFs could use a boost via a cooler trade environment and less headline risk, but there are some solid fundamentals remaining in the sector. That makes some of the following tech ETFs worthy of consideration over the remainder of 2019.
Tech ETFs to Buy: VanEck Vectors Semiconductor ETF (SMH)
Expense Ratio: 0.35%
Semiconductor stocks have been front and center during the trade controversy, but the reality is the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) lost just a third of a percent last month, and there are reasons to be optimistic about chip stocks. Adding to the case for this tech ETF is that semiconductor demand is usually strong in toward the end of the year, a scenario that should it repeat, would defy calls for slack demand.
Another iPhone demand cycle coupled with ongoing 5G investments are among the factors that should support chip demand over the next several months. Increased data center spending, discussed here, also has the potential to support tech ETFs and chip names over the near- to medium term.
Additionally, SMH is technically healthy relative to other tech ETFs. The fund resides well above its 200-day moving average and just 6.2% below its 52-week high, indicating more new highs before the end of 2019 are not an unreasonable expectation.
Global X Cloud Computing ETF (CLOU)
Expense Ratio: 0.68%
One of this year’s most successful new ETFs, the Global X Cloud Computing ETF (NASDAQ:CLOU) has over $500 million in assets under management following its April debut. This tech ETF currently resides about 8% below its highs due in large part to valuations concerns in the Software-as-a-Service (SaaS), a major area in CLOU.
Broadly speaking, cloud stocks are growth fare, leaving the door open for some retrenchment when investors favor more defensive, lower-volatility strategies. Conversely, CLOU is backed by an enticing, fundamentally sound long-term proposition.
“The global cloud computing market is estimated to be worth well-over $300 billion by 2022, up from about $188 billion today and growing at a compound annual growth rate (CAGR) of 14.6%,” according to Global X research.
WisdomTree Modern Tech Platforms Fund (PLAT)
Expense Ratio: 0.45%
Another rookie tech ETF, the WisdomTree Modern Tech Platforms Fund (NYSEARCA:PLAT) debuted in May and takes a unique approach to tech investing, opting to focus on asset-light, transformative, platform-based business models.
“WisdomTree defines a modern technology platform as a company with a non-linear, multi-sided business model focused on creating value by facilitating interactions between two or more interdependent groups through technology,” according to the issuer.
PLAT is not a dedicated tech ETF, as it features exposure to six sectors with communication services and consumer discretionary combining for 57% of the fund’s weight.
“The structural advantages of the platform-based businesses we seek to invest in can be reflected in financial metrics through robust revenue growth, margin expansion, substantial free cash flow generation and strong returns on capital,” WisdomTree said.
iShares U.S. Technology ETF (IYW)
Expense Ratio: 0.42%
A decent idea for the investors looking for basic tech exposure via the ETF wrapper, the iShares U.S. Technology ETF (NYSEARCA:IYW) is often known for its large combined weight to industry behemoths Microsoft (NASDAQ:MSFT) and Apple. Those stocks combine for nearly a third of this tech ETF’s weight.
Of course, those are quality stocks, as is much of IYW’s lineup, in a sector not known for being a value play. But investors should not be put off by the valuations on some of IYW’s marquee holdings.
“The sector trades at approximately 21.5 times trailing earnings and 20 times forward earnings. Current valuations compare favorably with the long-term average but look elevated relative to the post-crisis norm,” according to BlackRock. “The sector trades at a 10%-15% premium to the broader market. This is above the post-crisis average of about 4%. That said, it is worth noting that relative value looks more compelling based on other metrics, notably price-to-cash-flow. On this metric the sector’s current relative valuation is below the post-crisis average.”
Invesco DWA Technology Momentum ETF (PTF)
Expense Ratio: 0.6%
It might appear to be reasonable to assume that the combination of technology stocks and momentum was punitive for the Invesco DWA Technology Momentum ETF (NASDAQ:PTF) in August, but the opposite is true. This tech ETF actually outperformed more prosaic rivals, losing just a third of a percent in the eighth month of the year.
PTF follows the DWA Technology Technical Leaders Index. That benchmark “designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 securities from the NASDAQ US Benchmark Index. Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe,” according to Invesco.
PTF holds 39 stocks with an average market value of $22.7 billion, which is far smaller than what is found on more traditional tech ETFs. The Invesco fund is a growth ETF as over 93% of its holdings are designated as growth stocks and it is a software proxy as that industry represents over 59% of its weight.
Global X Internet of Things ETF (SNSR)
Expense Ratio: 0.68%
Being a thematic fund, the Global X Internet of Things ETF (NASDAQ:SNSR) could be the type of play that investors abandon in rough markets, but that would be the wrong way of approaching this tech ETF. Yes, SNSR is more volatile (standard deviation of 18.5%) than a run-of-the-mill tech ETF like IYW or XLK, but there is also significant growth potential here.
Few, if any, of the disruptive technology themes investors have been hearing so much about over the past couple of years have the reach that the Internet of Things has, meaning it touches both businesses and consumers and in significant fashion.
“On the enterprise side, the IoT will help businesses collect vast amounts of data that can be used in varying capacities, from predicting consumer behavior to reducing supplier risks,” according to Global X. “Forecasts expect 20.4 billion connected devices to be online by 2020 with $1.4 trillion in worldwide annual spending on IoT hardware, software and services by 2021.”
First Trust Nasdaq Technology Dividend ETF (TDIV)
Expense Ratio: 0.5%
Dividends are meaningful drivers of long-term total returns and stocks in this category, particularly dividend growers, are often less volatile than their non-dividend peers. The First Trust Nasdaq Technology Dividend ETF (NASDAQ:TDIV) proves as much as it has been significantly less volatile than the Nasdaq-100 and broader tech ETFs over the past several years.
Owning this tech ETF means capturing exposure to mature tech companies, some with value profiles and some that can be laggards relative to their growth-oriented peers.
The upside is the aforementioned reduced volatility, quality balance sheets, dependable dividend growth and a better yield (2.28%) and more upside potential than government bonds.
As of this writing, Todd Shriber does not own any of the aforementioned securities.
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