Tech investors can hardly be blamed for their recent optimism, considering the drubbing they’ve endured this year.
The sector is among the year’s hardest-hit, with the Technology Select Sector SPDR Fund (XLK) falling as much as 32%. After the exchange-traded fund’s 10% jump this month, investors may be wondering if the time has come to buy more, or if this is another in a series of bear market rallies.
Inflation and rising interest rates typically hurt tech companies, which typically own few hard assets and often borrow to fuel growth. With last week’s consumer price index and this week’s producer price index numbers suggesting inflation is cooling off, tech investors bid up prices after months of bad news.
It remains to be seen whether the uptick will develop into a longer-term trend.
iShares recently released an outlook for 2023 that projected that cybersecurity and robotics would offer strong performance, though it also stated that technology is not a monolith. The $1.5 billion ETFMG Prime Cyber Security ETF (HACK) is down 25.1% year to date, but up 8.6% over the last month.
Cloud computing should get a boost as more and more end users switch to web-based software and other products, so the 32%-49% downside seen by ETFs covering that category might make for an attractive entry point. Additionally, semiconductors are what drive the tech industry. Deloitte estimates the two-year chip shortage caused $500 billion in lost revenues globally and sees the sector entering a period of “robust secular growth.”
“Software companies are cutting costs, but where the tech sector isn’t cutting back is cybersecurity,” said Jay Jacobs, head of thematics and active equity ETFs at BlackRock.
That rosy outlook isn’t necessarily going to hold true for all technology stocks.
Not Everyone Sees Sunshine for Tech
Indeed, the optimism isn’t necessarily widespread. The ProShares UltraPro Short QQQ ETF (SQQQ) just saw its largest inflow ever, gaining nearly $700 million last Friday.
SQQQ offers three times the inverse performance of the Nasdaq-100 Index, which has an allocation of roughly 50% to tech stocks and is seen as a proxy for the tech sector. Despite its exuberant performance last week, there is clearly a segment of traders who think the index’s rebound will be short-lived. QQQ is down 27.3% year to date.
Tech stocks have a deep hole to dig themselves out of. Despite the recent uptick, funds falling under the tech rubric are down anywhere from 12% to 50% year to date. The $661.7 million WisdomTree Cloud Computing Fund (WCLD) is down 47.4% during that period, though ETFs focused on U.S. semiconductor companies are down 28.5%-30.1%.
Despite that big bet on SQQQ, the signs pointing toward moderating inflation suggest the worst may be over for tech stocks. A recent CNBC article noted that technology demand and spending are likely to continue to grow, further supporting that idea. Either way, there are multiple bright spots in the sector, and multiple ways to play them via ETFs.
Contact Heather Bell at [email protected]