The technology sector, which is the biggest contributor of the nine-year bull market and the Trump rally, has been caught in vicious trading over the past month. This was primarily due to the huge decline in large-capitalization technology and Internet stocks, as a result of a slew of negative news from some of the key companies in the space (read: 5 Reason Why FANG ETFs Lost Their Charm in March).
The initial panic was triggered on Mar 19 when data analytics firm Cambridge Analytica revealed data breach of more than 50 million of Facebook FB users. This resulted in a sharp decline in the stock and the broader sector. This sparked concerns about data privacy and security and the prospect of more regulations. NVIDIA NVDA announced the suspension of self-driving tests, raising concerns over new growth areas in the space and pushing shares down. Twitter TWTR also dropped on expectations of further regulations on its platform. while Tesla TSLA is losing on concerns over a recent Model X accident and lower-than-expected Model 3 production. Netflix NFLX is probably being crushed for its super-high valuation.
Adding to the woes was the decline in Amazon AMZN shares late last week, which shed about $30 billion from its market value on a single day. News that President Donald Trump is looking to target the e-commerce giant over antitrust or competition laws and is considering ways to change the tax treatment took its toll on the stock. The stock yet again took a hit to start the week as Trump continued his series of Twitter attacks on the online retailer (read: ETFs to Turn Amazon's Pain Into Your Gain).
The sell-off deepened with resurgent fears of a trade war between United States and China. This is especially true as China has retaliated against Donald Trump’s taxes on imported steel and aluminum with its own tariff of up to 25% on a series of 128 products worth $3 billion from the United States, including pork and wine, effective Apr 2. The Trump administration, looking to punish Beijing over technology transfer policies, is also expected to reveal the list of Chinese imports targeted for U.S. tariffs by this week.
Trump has already signed an executive memorandum to impose tariffs on up to $60 billion in Chinese imports, targeting the technology, telecom, and apparel sectors. The round of sanctions and retaliation could trigger a global trade war, hurting the global economy and corporate profits at big U.S. exporters. In particular, technology stocks are expected to be hit hard as most of the tech companies, especially semiconductor manufacturers and software companies, have large operations in the Chinese market.
The ultra-popular Select Sector SPDR Technology ETF XLK pulled out more than $539 million in capital since the Facebook scandal, per etf.com. The fund has declined 6.6% over the past month. The negative sentiment is likely to continue, at least in the near term, as the technology sector has a dismal Zacks Rank of 10 out of 16 and falls in the bottom 38%. Further, the sector has been trading at a P/E ratio of 20.93, the second highest of all the 16 Zacks sectors, signaling some pain in the coming days. Return on equity is also lower than many other sectors at 6% (read: Wall Street Sees Worst Week in 2 Years: ETF Winners & Losers).
Given this, investors could easily tap this bearish trend by considering a near-term short on the technology sector. Fortunately, with the advent of ETFs, this is quite easy as there are a few options to accomplish this task. Below we highlight them and some of the key differences between each.
ProShares UltraShort Technology REW
This fund seeks two times (2x) inverse exposure to the Dow Jones U.S. Technology Index, charging 95 bps in fees. It has amassed $3.7 million in its asset base and trades in a paltry volume of around 8,000 shares per day on an average. REW has returned about 12.9% over the past month.
Direxion Daily Technology Bear 3x Shares TECS
Investors having a more bearish view and a higher risk appetite may find TECS interesting as the product provides three times (3x) inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $4.7 million in its asset base while charging 95 bps in fees per year from investors. Volume is good as it exchanges around 104,000 shares a day on average. The fund has gained 17.8% in the same timeframe.
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN FNGD
This ETN provides three times inverse exposure to the NYSE FANG+ Index, which is an equal-dollar weighted index targeting the highly-traded growth stocks of next generation technology and tech-enabled companies in the technology and consumer discretionary sectors. The index comprises the so-called five FANG stocks, Alibaba BABA, Baidu BIDU, NVIDIA, Tesla and Twitter. The note recently debuted in the space and has accumulated $48.5 million in AUM in a span of three months. It trades in a small volume of 23,000 shares and charges 0.95% in expense ratio. FNGD has gained 35.5% in a month (read: New Triple Leveraged FANG ETFs: Should You Buy?).
ProShares UltraShort Semiconductors ETF SSG
This fund targets the semiconductor corner of the broader technology sector as it provides two times inverse exposure to the daily performance of the Dow Jones U.S. Semiconductors Index. It is an unpopular and illiquid choice in the space with AUM of $2.6 million and average daily volume of around 12,000 shares. Expense ratio comes in at 0.95%. The fund has added 10.8% in the same timeframe.
Direxion Daily Semiconductor Bear 3x Shares SOXS
This ETF offers three times inverse exposure to the PHLX Semiconductor Sector Index, charging investors 95 bps in annual fees. It has amassed about $51.9 million in its asset base while trading in solid volumes of 1.1 million shares a day on average. The fund has surged 18.4% in the same timeframe.
As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Inverse Equity ETFs here).
However, for ETF investors, who are bearish on the technology sector for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that “trend is the friend” in this corner of the investing world.
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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Netflix, Inc. (NFLX) : Free Stock Analysis Report
Alibaba Group Holding Limited (BABA) : Free Stock Analysis Report
Baidu, Inc. (BIDU) : Free Stock Analysis Report
Facebook, Inc. (FB) : Free Stock Analysis Report
Twitter, Inc. (TWTR) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
SPDR-TECH SELS (XLK): ETF Research Reports
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
DIR-D SM BR 3X (SOXS): ETF Research Reports
DIR-TEC BEAR3X (TECS): ETF Research Reports
PRO-ULS TECH (REW): ETF Research Reports
PRO-ULS SEMICON (SSG): ETF Research Reports
BMO-RM FG I3XIL (FNGD): ETF Research Reports
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