Technology ETFs were badly hit in the first quarter of 2016, having returned minutely or posting massive losses. Among the gainers, most were from either the high-yielding or equal-weight or value-centric semiconductor segments (read: Tech ETFs that Braved the Storm in February).
Broad-based sell-off in high-growth stocks due to overvaluation concerns, global growth issues and corporate recession kept this space off radar. Adding to the tension was LinkedIn Corp.’s (LNKD) lackluster guidance for the first quarter of 2016 issued in early February (read: LinkedIn Crashes: Should You Connect with Social Media ETF?).
Along with LinkedIn, the famous FANGs (Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG) (i.e. Alphabet) were also thrashed. Notably, the famous four contributed a lot to last year’s tech surge. However, the bloodbath in these stocks weighed down the tech-laden Nasdaq exchange, forcing it to be the worst performing index among the top three U.S. indices.
Sell-Off in Tech Sector Looks Overdone; Why?
However, things took a turn for the better in the last one month as risk-on sentiments returned to the market on a flurry of upbeat U.S. economic data. Plus, the Fed promised to take a cautious stance on the future interest rate policy indicating a longer low rate environment and underpinning the bullish sentiments for high-growth sectors like technology.
If this isn’t enough, a dovish Fed dampened the U.S. dollar lending support to the tech sector, which has considerable foreign exposure. Yes, earnings of the sector is still far from anything that looks decent as evident from the expected earnings decline 5.2% for the first quarter (as per Zacks Earnings Trends issued on March 29, 2016), but future trends are reassuring.
The sector’s earnings are expected to decline just 0.6% in the second quarter of 2016 and likely to enter the positive territory in the third quarter (expected growth rate is positive 4.6%). The revenue picture is reasonable enough with positive growth trend expected for every quarter of 2016.
Out of the 16 S&P sectors, technology is currently reasonably valued with its P/E at 17.2x and 15.5X respectively for 2016 and 2017 expected earnings. While this goes in line with 17.4x and 15.4x P/E of the S&P 500 index, the valuation falls behind the forward P/E ratio of consumer staples, retail wholesale, conglomerates, energy and business services.
All in all, after a beaten-down Q1, the sector is gaining traction to start Q2. So, investors intending a momentum play in the tech space can bet on the following ETFs, each of which underperformed in Q1 and is due for a strong reversal in Q2. The ETFs offered solid returns in the last five days too (as of April 1, 2016).
PowerShares Dynamic Software Portfolio ETF (PSJ)
The fund comprises stocks of software companies. The underlying index looks to track companies picked up on criteria like fundamental growth, stock valuation, investment timeliness and risk factors. The 30-stock fund charges 63 bps in fees and added 5.3% in the last five trading days (as of April 1, 2016). PSJ is up just 0.6% in the year-to-date frame (as of April 1, 2016) and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
DWA Technology Momentum ETF (PTF – ETF report)
The PowerShares DWA Technology Momentum Portfolio tracks the Dorsey Wright Technology Technical Leaders Index which identifies companies that are showing relative strength. This 33-stock fund charges 60 bps in fees and returned about 4% in the last five trading sessions (as of April 1, 2016). However, the fund has lost about 5.6% so far this year (as of April 1, 2016). It has a Zacks ETF Rank #2 with a High risk outlook.
iShares North American Tech-Software (IGV)
This 58-stock ETF provides exposure to the software segment of the broader U.S. technology space. The product charges 48 bps in annual fees. The fund is down 2.2% in the year-to-date frame but returned 3.1% in the last five trading sessions (as of April 1, 2016). The fund has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: Top Tech ETFs of 2015:The Best from a Winner).
PureFunds ISE Cyber Security ETF (HACK)
The fund offers global exposure to those companies that ensure safety to computer hardware, software and networks, and fight against any sort of cyber malpractice. It tracks the ISE Cyber Security Index, holding 35 securities in its basket. From an industrial look, systems software accounts for nearly 60% of the portfolio. The fund charges 75 bps in fees per year from investors. HACK has lost about 7.3% so far this year but advanced 3.6% in the last five trading days (as of April 1, 2016) (read: Time to Buy Cyber Security ETFs on Decent Q4 Results?).
First Trust Technology AlphaDEX ETF (FXL)
The fund follows the StrataQuant Technology Index, which is a modified equal-dollar weighted index and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices using the AlphaDEX screening methodology. Software takes the top spot in the fund with about 24% weight. The 78-stock fund charges 63 bps in fees. This Zacks Rank #1 ETF is down 0.2% so far this year (as of April 1, 2016) but added over 2.8% in the last five trading days (as of April 1, 2016).
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