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‘There’s good value to be had’ for tech ETFs: Expert

Yahoo Finance's Kristin Myers and Head of ETF and Mutual Fund Research at CFRA, Todd Rosenbluth, discuss the risk in investing in tech ETFs as the sector loses steam this week.

Video Transcript

KRISTIN MYERS: --on research at CFRA. So Todd, I want to start off about the selloff that we saw, of course, led by tech. Now in the run up, a lot of people said, well, frankly some of these tech stocks are a little too expensive, so chose instead to get some exposure via tech ETFs. Now we're seeing we had this pullback, the rotation that we're seeing in the market. Are tech ETFs a little bit too risky to hold right now?

TODD ROSENBLUTH: No. We at CFRA still think there's good value to be had. We like technology ETFs. For example, XLK is it technology select sector spider. If you're going to buy tech ETFs, you really have to like Apple and Microsoft. Those are the two heavyweights, very concentrated portfolio.

We at CFRA have a bullish recommendation still on those companies, as well as companies like Visa that are also part of the portfolio. So we still think there's a good opportunity to be invested, but with the benefits of diversification using technology-- certain technology ETFs.

KRISTIN MYERS: So to that point, because I was reading your note, you don't see tech underperforming next year. And you're actually recommending that investors overweight the sector. I'm wondering what you're seeing coming up through to the end of 2020, but even ahead in 2021, any if there is at all a concern, perhaps, of a larger pullback coming in the next couple of months.

TODD ROSENBLUTH: Well, there's always going to be pullbacks that take place that give, perhaps, buying opportunities. We at CFRA have a few overweight recommended sectors, technology being one of them, communication services. Those are the more growth-oriented sectors that we like, and health care and consumer staples that are more defensive. So we do think you want to balance your portfolio out with both cyclical, risk-on, as well as more defensive, risk-off areas.

Where we think there's still room to be had-- Apple has been performing very well, but has some news that's likely to be coming out that could drive the company forward. We think Microsoft has been a big beneficiary of the trend towards cloud. And again, those are the two heavyweight companies.

But there's also some good opportunities further-- slightly further down the market cap spectrum and with ETFs like XLK or VGT, which is the Vanguard Information Technology ETF. You get that diversification. Or you can get a little bit more targeted with some more industry or thematic-oriented ETFs.

KRISTIN MYERS: Looking through your note, I was struck by the fact that energy ETFs most popular. And given the fact that energy has been lagging the broader market, what do you think has been behind that trend?

TODD ROSENBLUTH: So bottom fishing is likely what's happening. Investors have been looking to take the value opportunities and hope that there's going to be a recovery that's faster than expected. You're right XLE, which is the energy select sector spider, year-to-date through August had more inflows than technology-oriented ETFs.

The irony is that its asset base is largely flat where it was at the beginning of the year, despite having over $3 and 1/2 billion of net inflows. So 35%, give or take, of the assets grew because the portfolio was down more than 35%. So not a good investment. It has not worked out for many people.

But it's a sign that energy, as well as utilities, which was an area that's been underperforming-- investors are becoming more tactical this year, using sector-oriented ETFs. It's typically been a part of the ETF lineup. But it's increasingly been used as investors want to be focused on certain sectors, either growth or more value-oriented defensive sectors.

KRISTIN MYERS: So quickly, before I run out of time with you, Todd, I want to ask about actively-managed ETFs. They're growing in popularity. Do you think investors are better served with active management?

TODD ROSENBLUTH: Well, we're certainly seeing more of them. So we've had new entrants, like T. Rowe Price, enter the ETF market. We've got Fidelity and American Century. If you believe in active management, and there are many people who still think you can find value in outperforming the broader market, you get the tax efficiency benefits and liquidity that you're used to with ETFs. So really excited about what's happening. We've got some other players that are lined up to come to market, like JPMorgan, with active ETFs like this, as well as Invesco.

KRISTIN MYERS: All right, Todd Rosenbluth, head of ETF and mutual fund research at CFRA, thank you for joining us today.

TODD ROSENBLUTH: Thank you.