Tech Sector: Quiet Underperformer

November 05, 2015

Looking Ahead
Jacobsen, and Chuck Self, chief investment officer at iSectors, are both bullish on technology, and believe it will outperform.

Jacobsen says he is “broadly optimistic” on technology for two reasons. First, he expects to see growth in capital expenditures by companies, which should support technology firms. Second, he says valuations are reasonable.

“Capital expenditures have been somewhat lagging over the last few years, and I think we can argue that companies have not been investing enough in technology ever since the tech bubble burst,” he said.

Additionally, in the past few years, technology companies have started to generate much more free cash flow, and valuations haven’t caught up with that cash flow, Abssy says.

Self agreed that companies will start to increase their spending on technology, and he expects to see “significant” spending by consumers on the Windows 10 operating system.

Different Tech Sector ETFs
Self said he likes the iShares North American Tech ETF (IGM | A-86). It represents both U.S. and Canadian technology companies and includes stocks from the S&P Total Market Index. He says the fund is also not so heavily weighted in Apple that it overwhelms the fund, unlike other technology funds.

“I don’t have a view on Apple, but I would be concerned about any fund with a 15-20% weighting in any company,” he said.

JJ Feldman, portfolio manager at Miracle Mile Advisors, also likes technology, but is taking a more diversified approach in his current investment. Previously, he owned XLK and the First Trust Nasdaq Technology Dividend Index Fund (TDIV | A-65).

This year he’s invested in the PowerShares QQQ (QQQ | A-64). Feldman says what draws him to QQQ is that it’s more diversified than the average technology fund, and it’s beaten the S&P 500 for the past few years.

“Compared to the S&P 500 year-to-date, despite everything, QQQ is up 1.3% [as of Sept. 28], and the S&P 500 is down 4.77%,” he said, He believes part of that is the diversity of the fund, which is not straight technology.

Warning Signs Flashing
One ETF fund firm is wary about the technology sector and the broader market in general. Ryan Ballantyne, executive vice president of sales and trading at Reality Shares Advisors, says its Guardian indicator, which uses a factor-based approach of momentum in combination with volatility, has is negative on technology and other sectors.

The firm said the short-term moving average price trend for technology fell below its long-term average on Aug. 31, and its volatility levels surpassed long-term averages by the market close on Oct. 12. It’s the fifth sector to turn negative in the Guardian Indicator, after health care, energy, utilities and consumer staples.

Yet Ballantyne says that, from a pure fundamental perspective, the technology sector is strong when looking solely at its dividend payments.

“IT has been the biggest contributor to dividend growth over the last several years,” he said, noting that as of 2014, Nasdaq dividend payments were just under $60 billion, versus just over $7 billion in 2004.

Looking at dividends versus just share price may be another way to play technology, Ballantyne says.

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