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Tech ETFs Plummet on Antitrust Scrutiny Fears

Technology sector took a hit badly in yesterday’s trading session on antitrust scrutiny concerns that sent the tech-heavy Nasdaq Index into a correction territory (10% decline from an early May high). This is especially true as Congress is launching a bipartisan investigation into digital markets and the tech industry for “competition problems” and “anti-competitive conduct”.

Government regulators are setting the stage for potential antitrust probes into four technology giants, namely Apple AAPL, Facebook FB, Amazon AMZN and Alphabet GOOGL. The Department of Justice (DoJ) will launch a potential inquiry into Google and Apple while Federal Trade Commission (FTC) will examine antitrust issues at Facebook and Amazon (read: 5 Tech ETFs Braving Trade Tensions in May).

Though the investigation has not yet started, it could lead to years of pains for the four tech giants, raising the prospect of lawsuits to break up companies, hefty fines or new laws limiting their reach.

Market Impact

The news has wiped out more than $133 billion from the market value of these four technology giants. Particularly, Alphabet tumbled as much as 7% on the day to their lowest level in five months, which pushed the stock into a bear market zone. Shares of GOOGL dropped 20.8% from its April peak. Facebook witnessed the steepest one-day decline since July 2018, plunging 7.5% while Amazon and Apple shed 4.6% and 1% of value, respectively.

The awful trading scenario in the stock world also pushed the technology ETF space in the deep red on the day. Global X Cloud Computing ETF CLOU and Invesco DWA Technology Momentum ETF PTF stole the show, plunging at least 4.3% each. This was followed by DJ Internet Index First Trust FDN, iShares Expanded Tech-Software Sector ETF IGV, ISE Cyber Security ETF HACK, Factset Innovative Technology SPDR XITK, O'Shares Global Internet Giants ETF OGIG, SPDR S&P Software & Services ETF XSW and Nasdaq Internet Invesco ETF PNQI that lost more than 3% on the day (see: all the Technology ETFs here).

CLOU seeks to invest in the companies that are positioned to benefit from the increased adoption of cloud computing technology while PTF provides exposure to broad technology companies, which exhibit relative strength (momentum). FDN and PNQI target the internet corner of the broad technology sector while OGIG offers global exposure to the largest internet and e-commerce companies that display quality and growth potential. IGV provides targeted exposure to software companies in the technology and communication services sectors while XSW offers exposure to the software and services segment of the technology sector.

Meanwhile, XITK looks to obtain exposure to tech companies with robust revenue growth that may provide leading-edge products and services.

What Lies Ahead?

Despite such a downtrend, the outlook for the sector appears quite promising. This is specifically true as the S&P 500 Technology Sector Index has clearly outpaced the S&P 500 Index from the year-to-date look. In fact, the index has enjoyed a strong rally with an annualized return of 13.6% compared with 9.5% for the S&P 500 Index (read: Tech Adds Trillion Dollar in Market Cap: 5 Best ETFs YTD).

Additionally, the sector’s long-term story is intact with the emergence of cutting-edge technology such as cloud computing, big data, IoT, wearables, VR headsets, drones, virtual reality, artificial intelligence and machine. The deployment of 5G technology — the next wireless revolution — is creating further opportunities. The wave of mergers and acquisitions is also providing a further impetus to this space.

Moreover, the above-mentioned ETFs have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Given the solid long-term outlook but somewhat bearish near-term sentiments, investors may want to stay on the sidelines for the time being. However, risk-tolerant long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility.

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Facebook, Inc. (FB) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
First Trust Dow Jones Internet Index Fund (FDN): ETF Research Reports
iShares Expanded Tech-Software Sector ETF (IGV): ETF Research Reports
SPDR S&P Software & Services ETF (XSW): ETF Research Reports
Invesco DWA Technology Momentum ETF (PTF): ETF Research Reports
Invesco NASDAQ Internet ETF (PNQI): ETF Research Reports
ETFMG Prime Cyber Security ETF (HACK): ETF Research Reports
SPDR FactSet Innovative Technology ETF (XITK): ETF Research Reports
GLBL-X CLD CPU (CLOU): ETF Research Reports
O?Shares Global Internet Giants ETF (OGIG): ETF Research Reports
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