Are Technology ETFs In Danger? (XLK)

technology sector

From Zacks: The U.S. technology sector was irresistible until recently as evident by the 19.5% year-to-date gains in the tech-heavy Nasdaq-100 ETF PowerShares QQQ ETF (QQQ) and 18.6% advancement in Technology Select Sector SPDR ETF (XLK).

However, it stumbled on Sep 25, 2017.

The tech biggie XLK lost about 1.2% on the day. Global X Social Media Index ETF (SOCL – Free Report) was off 2.9% while PowerShares NASDAQ Internet Portfolio (PNQI – Free Report) lost2.5%.The once-soaring China tech space was also not spared as Guggenheim China Technology ETF (CQQQ – Free Report) shed about 4.8%.

What’s Behind the Crash?

Safe-Haven Trades

A safe-haven rally on renewed North Korea’s war-related tensions and overvaluation concerns probably hit the space badly.U.S. President Donald Trump’s incendiary rhetoric on North Korea’s nuke tests caused considerable upheaval in the broader market this year (read: North Korea Jitters: ETF Winners and Losers).

Following North Korea’s most powerful nuclear test on Sep 3, the 15-member Security Council voted on a U.S.-drafted resolution and slammed the rogue nation with a new round of sanctions on Sep 18.

The relation between the duo soured so much that North Korea’s foreign minister indicated on Monday that a weekend tweet by Trump has been considered “as a declaration of war on North Korea” and that Pyongyang will not step behind to take counter actions, as per Reuters. If this was not enough, it is reported that North Korea has been fortifying defense on its east coast after U.S. Air Force B-1B bombers were flown to the Korean peninsula.

Added to this, German Chancellor Merkel won her fourth term, but the victory was dull. In fact, the anti-immigrant nationalist alternative party secured an entry into the parliament. This pointed to Merkel’s ebbing political strength.

Needless to say, such provocative dialogues and actions on the North Korea front and political developments in Europe have boosted safe-haven bids. SPDR Gold Shares (GLD – Free Report) inched up 1.1% while iShares 20+ Year Treasury Bond ETF (TLT – Free Report) added about 0.7% on Sep 25. On the other hand, the risky trades retreated.

Overvaluation Concerns

It seems that every piece of good news in the tech sector has been baked in the current valuation. After all, the market value of Apple, Alphabet Inc., Microsoft Corp., Inc. and Facebook has risen by leaps and bounds since December. As a result, the tech section dived in June on overvaluation and now this (read: Correction in U.S. Tech Sector? Inside Most-Hurt ETFs).

FAANGs flopped. Facebook (FB – Free Report) fell 4.5%, (AMZN – Free Report) lost 1.6%, Netflix Inc. (NFLX – Free Report) plunged 4.7%, NVIDIA NVDA retreated 4.5%, Electronic Arts EA lost 3.6%, Apple (AAPL – Free Report) was down 0.9%, and Microsoft dropped 1.5%.

Facebook logged its biggest percentage decline since November. As per Wall Street Journal, some analysts attributed this fall to reports showing that the company contending with a raft of controversies, “including how it responded to Russian activity on its site before the U.S. election and its recent plan to change its stock structure, which it abandoned last week.”

Is the Run Over?

Probably not. After all, a stock’s outperformance boils down to earnings potential. The technology sector is expected to see earnings growth of 9%, following 17% expansion in earnings. Expected revenue growth for the third quarter is 6.7%, after an increment of 7.6% as per the Earnings Trends issued on Sep 20. These are pretty decent numbers to take the sector forward.

Secondly, tech stocks are cash-rich. The information technology sector held the largest cash balance ($672.7 billion) at the end of Q3 of 2016. Technology is the third-largest sector in terms of share buyback (read: 4 ETFs to Profit Out of Cash Kings).

Plus, there are a lot of innovations going on in the sector, which are sure to thrive over the long run. So, at this moment, investors can play those tech ETFs that were less hurt on Monday’s rout and bet on the broader sector once the lull passes.

ETFs to Play  

iShares Exponential Technologies ETF XT – Down 0.9% on Sep 25

ROBO Global Robotics and Automation Index ETF (ROBO – Free Report) – Down 0.6%

SPDR S&P Technology Hardware ETF XTH – Down 0.7%

The Technology Select Sector SPDR Fund (XLK) was trading at $58.87 per share on Friday morning, up $0.17 (+0.29%). Year-to-date, XLK has gained 22.69%, versus a 13.07% rise in the benchmark S&P 500 index during the same period.

XLK currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 52 ETFs in the Technology Equities ETFs category.

This article is brought to you courtesy of Zacks Research.