Time To Buy The Dip In Technology ETFs?

From Zacks: Wall Street, which had a pretty strong third quarter, has not seen a smooth opening to the fourth quarter. There was a brutal selloff in early-October, thanks apparently to rising rate concerns, and since then the market has remained edgy.

The slump was primarily triggered by tech blues as panic-selling caused a rout in the high-flying tech names like Apple (AAPL – Free Report) , Amazon (AMZN – Free Report) and Alphabet (GOOGL – Free Report) (read: Profit From Market Bloodbath With These Inverse ETFs).

In fact, the tech-heavyNasdaq composite index saw its biggest loss in more than two years on Oct 10. Along with several analysts, we also believe the vast selloff in tech stocks was just because of overvaluation concerns and investors’ indulgence in profit booking.

Per an article published on Associated Press, technology and Internet-based companies normally record high profit margins. Now, in a rising rate environment, profitability of those companies will be compromised as they will end up paying higher interests on borrowed money. This stretches the stocks’ already-hefty valuations.

However, investors should note that this sudden rout in the tech sector seems to be passing and is will longer bear a long-term impact. There are plenty of favorable factors that justify a buy-the-dip-in-tech ETFs. Investors should note that the sector is winning investors back slowly as Invesco QQQ Trust (QQQ – Free Report) attracted $425.8 million from Oct 14 to Oct 23.

Why The Sector Could Bounce Back Soon

The technology sector has been on sturdier ground, with full-year earnings up 16% in 2017 and expected to grow 21.1% in 2018. Rising enterprise spending, the tailwind of tax cuts and emerging technologies like cloud computing, artificial intelligence and big data are the wind beneath the wings of the tech sector (see all technology ETFs here).

Investors should note that tech behemoths hoard huge cash overseas and are poised to benefit the most from Trump’s repatriation tax policy. Also, investors can expect higher dividend distribution or share buyback from this move. Plus, a pickup in the global economy is great for a cyclical sector like technology (read: 5 Tech ETFs That Crushed FANG ETFs in 2017).

Goldman Sach’s strategists led by David Kostin believe that “computer and software makers are cheaper than they’ve been historically, and fund managers currently hold fewer tech stocks than their representation in benchmark indexes,” as noted in Bloomberg. Goldman sees risks of ‘” overcrowding and outperformance” as exaggerated.

Goldman showed that tech shares traded at a P/E ratio that is 7% higher than the S&P 500 index, well under the average premium of 30% over the past three decades. If a sector like technology is delivering profit margins twice the broader market, such nominal premium is justified.

And investors who are still on shaky ground may take a look at a few tech ETFs that were among the less-punished in the past week (as of Oct 19, 2018). Notably, the largest tech ETF Technology Select Sector SPDR ETF (XLK – Free Report) lost about 0.8% in the past week.

ETFs in Focus

SPDR S&P Technology Hardware ETF (XTH – Free Report) – Up 3.41%

ETFMG Prime Mobile Payments ETF (IPAY – Free Report) – Up 1.58%

First Trust NASDAQ CEA Smartphone Index Fund (FONE – Free Report) – Up 0.84%

Invesco S&P SmallCap Information Technology ETF (PSCT – Free Report) – Up 0.54%

Defiance Quantum ETF (QTUM – Free Report) – Up 0.27%

SPDR S&P Software & Services ETF (XSW – Free Report) – Down 0.48%

The Technology Select Sector SPDR Fund (XLK) was unchanged in premarket trading Wednesday. Year-to-date, XLK has gained 10.30%, versus a 2.94% 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 68 ETFs in the Technology Equities ETFs category.

This article is brought to you courtesy of Zacks Research.