How to Find Best Value With Tech ETFs

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FAANG stocks, or Facebook (NasdaqGS: FB), Apple (NadaqGS: AAPL), Amazon (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX) and Google (NasdaqGS: GOOG), are not often considered value plays. The same goes for the broader technology sector. Technology’s bullish ways are not, however, a free lunch as rising valuations indicate.

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However, some signs indicate there might be some value available with exchange traded funds, such as the Technology Select Sector SPDR Fund (NYSEArca: XLK).

XLK is the largest tech-specific ETF. 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.

“Technology valuations are often perceived as rich relative to other sectors, even when events like data breaches wipe out $37 billion off Facebook’s market value in one day,” said State Street Global Advisors (SSgA) in a recent note. “But this perception fails to account for the diversity of tech companies, their sub-sectors and the long-term growth potential of companies that are leaders in their fields.”

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Tech Investing Still In Favor

While technology, the largest sector allocation in the S&P 500, has seen some recent struggles, many investors remain bullish on the sector.

After surging 37% last year, technology remains a favorite among investors, despite data suggesting technology stocks are relatively expensive as they trade at elevated price-to-earnings compared to the broader S&P 500. Roughly a third of global fund managers say they are overweight tech in their portfolios, according to a recent Bank of America Merrill Lynch survey.

“Even after an exceptionally strong run in 2017, and the possible impact of greater regulatory intervention, the shorter-term outlook for technology remains robust,” said SSgA. “In our quantitative analysis, the tech sector’s value metrics continue to score highly compared to other sectors. Momentum and sentiment are also favorable, with sentiment capturing tech’s recently strong upward earnings and revenue revisions.”

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Even with Facebook’s recent slide, the sector has some notable tailwinds to consider.

“Stronger economic growth and a potential boost to capital expenditures from the US tax changes should provide tailwinds for these stocks. At the same time, tech companies tend to be less levered than other sectors—an advantage in an environment that is increasingly sensitive to rising interest rates—helping to support our positive near-term outlook,” according to SSgA.

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

Tom Lydon’s clients own shares of QQQ, Apple, Facebook and Microsoft.

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