Technology ETFs are even more attractive these days, CLS’ Scott Kubie says.
This article is part of a regular series of thought-leadership pieces from some of the more-influential ETF strategists in the money management industry. Today’s article features Scott Kubie, chief investment strategist at Omaha, Neb.-based CLS Investments.
Technology is now the top sector focus for us at CLS Investments, where we manage portfolios top-down and often on the basis of our macro views, overweight specific styles, regions and sectors as potential sources of value for our customers.
We believe the time is right for technology to return to the top of the sector charts. We are optimistic about tech because the economic environment strongly favors an increase in investment and an expansion of technology spending by businesses.
Thus, the sector looks attractive, particularly to its valuations and risk.
We think a number of funds are attractive, including Fidelity’s newly launched MSCI Information Technology ETF (FTEC); iShares’ North American Tech ETF, IGM (B-80); and, one of our favorites, PowerShares’ Small Cap Information Technology Portfolio, PSCT (A-39).
But before we look at those ETFs in detail, I’ll review the reasons we like tech so much these days.
The economic conditions are ripe for increased corporate spending on technology. As illustrated by the chart below, capital stock, relative to GDP, has been in a pronounced downturn since the 1990s. Companies have sought to repair their balance sheets rather than invest, and corporations continue to use their capital assets more efficiently. But eventually, the ability to get more out of the same machinery or computers starts to decline; thus, new spending becomes inevitable.
We also believe that the balance sheet healing is nearing completion.
The chart below shows that, as a percentage of total assets, corporate cash is at a 23-year high. This data point communicates two key messages. First, large corporations have sufficient cash to invest. Second, the aforementioned balance sheet healing must be close to ending.
At some point, investors are going to expect corporations to either put cash to work, or begin to distribute it in the forms of additional dividends or share repurchases. Executives will reach a point where they feel secure about their balance sheets and will start putting marginal cash flow to work.