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Why Investors Are Reducing Tech Exposure

This article was originally published on ETFTrends.com.

The Technology Select Sector SPDR Fund (XLK) , the largest tech-related ETF, is up more than 5% over the past week and technology remains one of the best-performing sectors this year, but data suggest some investors are departing the sector.

Broadly speaking, US-listed technology ETFs have not lost money on a quarterly basis since the second quarter of 2016 and four of the previous six quarters have seen massive amounts of capital flow into tech ETFs. To start the current quarter, outflows, though modest, are what tech ETFs are contending with.

“Alarm bells are ringing over valuations of the world’s leading technology stocks with worries over regulation causing many investors to cut exposure to the sector, Bank of America Merrill Lynch (BAML)’s April fund manager survey found,” reports Reuters.

XLK includes companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments and components; and wireless telecommunication services.

Declining Allocations for Tech

“While survey participants still saw the tech stocks as popular, allocations to tech actually fell to their lowest since February 2013 on fears companies such as Facebook could face tighter regulation and higher barriers to trade,” according to Reuters.

Still, the PowerShares QQQ (QQQ) , which tracks the tech-heavy Nasdaq-100 Index, added nearly $1.1 billion in new assets last week. However, QQQ has lost nearly $320 million in assets since the start of the second quarter, the tenth-worst outflows among US-listed ETFs on a quarterly basis. Investors have pulled nearly $104 million from XLK this quarter.

“In Q1 2018, we saw the first quarterly outflows from this asset class since 2016, though the net outflow of $151m is not significant compared with the $88bn in Q4 inflows,” according to IHS Markit. “So far in Q2, the outflow trend has continued, but with the quarter being one week old that could easily reverse if the market is able to find its footing.”

Next week, seven of the top 10 components in XLK deliver earnings reports. Tech is expected to be a key driver of S&P 500 earnings growth this year.

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

Tom Lydon's clients own shares of QQQ.