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Surprise: Tech Stocks Are Reasonably Valued

This article was originally published on ETFTrends.com.

Some market observers believe the technology sector is not as richly valued as previously thought and that the soaring sector may actually be offering some reasonable valuations. That could be good news for already high-flying exchange traded funds such as the iShares U.S. Technology ETF (IYW) .

The $4.24 billion IYW, which tracks the Dow Jones U.S. Technology Index, is up more than 14% year-to-date. Importantly, the growth factor has been trouncing its value counterpart for a while now, indicating investors are being rewarded for taking on supposedly higher valuations, but tech may not be all that expensive.

“While technology stocks are having another stellar year in an otherwise languid market, their outperformance has been driven primarily through stellar earnings, not obscene multiple expansion,” said BlackRock in a recent note. “Since the start of 2010, the trailing price-to-earnings ratio (P/E) for the S&P 500 Technology Sector Index has risen approximately 20%, only slightly faster than the 14% for the S&P 500 Index. A quick look at top-line valuations confirms that 2018 is not the late ’90s redux.”

Tech Valuations Below Average?

Believe it or not, by some metrics, technology valuations are actually below or inline historical norms.

“At 23 times trailing earnings, the sector is trading at a discount to the long-term average of 28. To be fair, the long-term average is distorted by the bubble years, when the sector traded as high as 70 times earnings. Using the median, a statistical measure less influenced by outliers, suggests that today’s valuation is right in line with the long-term norm,” according to BlackRock.

Related: How to Bet on Upside for Hot Tech ETFs

IYW holds nearly 140 stocks. Apple Inc. (AAPL) and Microsoft Corp. (MSFT) combine for over 29% of the ETF's weight. Overall, technology's premium to the broader domestic equity market is just 11%, according to BlackRock data. Additionally, many of the largest technology companies are highly profitable.

“With a return-on-equity of 20%, the sector remains profitable relative to both its history as well as the broader market. The current return on equity is six percentage points above the broader market. This compares favorably to the long-term median of around four percentage points,” said BlackRock.

For more information on the tech segment, visit our technology category.

Tom Lydon's clients own shares of Apple and Microsoft.

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