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Hedge Fund's Buy Dip in Tech Stocks: Follow Them With ETFs?

Sanghamitra Saha

Tech stocks, particularly FAANGs, were once investors’ favorite. But the space had a tough 2018, thanks to Facebook’s FB data breach issue, rising rate worries, overvaluation and U.S.-China trade tensions. Overall, Technology Select Sector SPDR ETF XLK lost 2.9% in the year but registered a sharp 17.8% decline in the fourth quarter. But this is when top hedge funds started adding tech stocks to their portfolios. The sector, in fact, ruled top holdings in the fourth quarter (read: Top Sector ETFs of 2018).

Citigroup assembled the data by reviewing regulatory filings from the largest 50 hedge funds. Facebook was the most-favored stock by the largest hedge funds, followed by Microsoft MSFT, Alphabet GOOGL, Amazon AMZN and Alibaba BABA, according to Citi, quoted on CNBC.

What’s the Sector’s Strength?

Tech titans hoard huge cash overseas and have benefited the most from Trump's tax reform policy. This increases chances of higher dividend distribution or share buyback. Also, increasing demand for emerging technologies like cloud computing, artificial intelligence and big data helped the sector (read: Why to Cash in on the Slump & Grab Tech ETFs).

So far 71.6% of total S&P companies reported their Q4 earnings. This marks a 9.5% year-over-year growth rate in earnings on 5% higher revenues. As many as 85.4% of companies beat on earnings while 62.5% surpassed revenues, per Earnings Trends issued on Feb 13, 2019.

Information technology stocks accounted for about 19% of hedge funds' top holdings in the fourth quarter of 2018. Buying the dip in tech helped hedge funds log a 3.5% rise in January, the best monthly performance since September 2010, per Hedge Fund Research.

Want to Load Hedge Funds’ Darlings Via ETFs?

By the end of Q4, 15 of the 50 largest hedge funds picked Facebook shares as one of their top 10 holdings, more than double the number of funds from Q3. The shares lost about 20% in Q4 only to jump 23.8% this year (as of Feb 19, 2019). The stock has a Zacks Rank #2 (Buy) with a VGM Score of B. It hails from a top-ranked Zacks industry (top 38%) and a Zacks sector (top 31%).

Investors can easily tap Facebook-heavy ETFs like Communication Services Select Sector SPDR Fund XLC, Fidelity MSCI Communication Services Index ETF FCOM and Vanguard Communication Services ETF (VOX).

Amazon AMZN also got huge attention from 13 out of the 50 biggest hedge funds, up from eight funds in Q3. Amazon added about 8.4% in the new year after shedding more than 25% in the fourth quarter. The company has a Zacks Rank #3 (Hold) and VGM Score of B.

Amazon-heavy ETFs like Fidelity MSCI Consumer Discretionary Index ETF (FDIS), ProShares Online Retail ETF ONLN and  Vanguard Consumer Discretionary ETF (VCR) can thus be tapped by investors.

Alibaba is also known for its solid comeback this year. It retreated 17% in Q4 only to jump 24% this year. The company has a Zacks Rank #3 and VGM Score of B. And Alibaba-rich ETFs are Invesco BLDRS Emerging Markets 50 ADR Index Fund ADRE, ONLN, Invesco BLDRS Asia 50 ADR Index Fund ADRA and iShares MSCI China ETF MCHI (read: Follow Loeb's 13-F Disclosure With ETF & Stock Strategies).

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Alibaba Group Holding Limited (BABA) : Free Stock Analysis Report
 
Facebook, Inc. (FB) : Free Stock Analysis Report
 
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
Vanguard Communication Services ETF (VOX): ETF Research Reports
 
Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports
 
Fidelity MSCI Communication Services Index ETF (FCOM): ETF Research Reports
 
Technology Select Sector SPDR Fund (XLK): ETF Research Reports
 
iShares MSCI China ETF (MCHI): ETF Research Reports
 
Invesco BLDRS Asia 50 ADR Index Fund (ADRA): ETF Research Reports
 
Invesco BLDRS Emerging Markets 50 ADR Index Fund (ADRE): ETF Research Reports
 
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
 
Communication Services Select Sector SPDR Fund (XLC): ETF Research Reports
 
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