Ways to Invest in Tech After a Big Run-Up

Among the lines many baby boomers may remember from the old Bugs Bunny cartoons was a scene where one of Bugs’ rivals, Elmer Fudd, was trying to get him as part of “Rabbit Season.”

As usual, Bugs fooled him into thinking it was “Duck Season,” frustrating both the hunter and Bugs’ other rival, Daffy Duck. Rabbit Season! Duck Season!  

Investors are now approaching the season they know possesses the potential for the same confusion. It is earnings season. 

Tech's Long Rally

Prices and valuations of big tech stocks have run up like rabbits for years. The trailing price-to-earnings ratio of the S&P 500 sits at about 24. And, it has been at or above 20 continuously since the start of 2015.

That qualifies as an extended period of much higher-than-average valuation in the context of long-term stock market history. So, with latest round of earnings upon us, investors wonder if they should duck for cover. 

For the past several quarters, tech stocks have been the last line of defense for stock investors, holding up an otherwise sanguine market, where the average stock is flat or down for nearly two years now. For investment advisors, big tech has helped pad portfolio returns when both the broad stock and bond markets offered little help. 

The Invesco QQQ Trust (QQQ) is up 34% so far this year. And a more focused ETF that is dominated by big tech, the Microsectors FANG+ ETN (FNGS) is up 65%. That’s where the action has been. But can it continue?  

New Risks to Tech ETFs 

At current valuations, and with market sentiment souring, will selling pressure in index funds by retail investors negate any happy buying of earnings beat the usual lowered estimates?

This has become common practice: Analysts set earnings estimates well in advance, they eventually lower them, and then companies “beat” those lowered estimates. It works if the market rewards it. But this market is changing quickly, bringing new risks to big tech stocks and the ETFs that rely on them. 

ETFs to Consider

For those looking for other ways to invest in tech stocks but without the emphasis on what has carried the market this year, there are plenty of exchange-traded funds that offer alternatives. 

The First Trust NASDAQ Technology Dividend Index Fund (TDIV) is a $1.9 billion fund that holds 100 stocks. They are all tech stocks that pay regular dividends, which means that some of the FAANG (Facebook, now Meta Platforms, Amazon, Apple, Netflix and Google, now Alphabet) and other uber-popular tech names are not eligible. 

The fund has gained 15.8% in 2023, less than half that of the more popular approach to the tech sector, the Technology Select Sector SPDR Fund (XLK), a $47 billion behemoth. So, for those scouting for a “chicken” (not duck) way to invest in technology stocks, TDIV is one alternative. 

The Invesco S&P 500 Equal Weighted Technology ETF (RSPT), which until this past June traded under the ticker symbol RYT, is another tech ETF that deserves some respect. It owns substantially the same portfolio as XLK, but all companies are equal weighted at the time of each fund rebalancing date, which occurs quarterly. 

The $3 billion fund is strong evidence of how unbalanced the tech sector has been this year. It is only up about 12% year to date, trailing XLK – which owns the same stocks, but weighed by market capitalization, by more than 20%! 

TDIV and RSPT are just two of several alternative ways to make a commitment to tech as part of a diversified portfolio, but without feeling like you are “chasing” the big, strong, but potentially overvalued and over-loved stocks at the top of the tech sector.