Shares of firms in the tech industry have been in focus during 2020, partly because of their resilience and, in fact, growth, despite the various economic and health consequences of the pandemic.
Indeed, during much of 2020, tech stocks, as well as ETFs that follow various tech indices, have enjoyed spectacular returns. In this category, those listed on the NASDAQ Composite typically get the most headlines.
Though the rotation may not be ongoing, but seems to be ocurring in fits and starts, , For instance, the NASDAQ 100 which comprises 100 of the largest non-financial companies listed on the NASDAQ, is up over 41.7% year-to-date (YTD). Similarly, the Invesco QQQ Trust (NASDAQ:QQQ), a fund that tracks the NASDAQ 100 index has returned over 41%.
Since most members of the NASDAQ 100 do not pay dividends, the current price of QQQ supports a dividend yield of only 0.54%.
Investors looking for businesses that may be next in line to be included in the NASDAQ 100 could consider the Invesco NASDAQ Next Gen 100 ETF (NASDAQ:QQQJ). The fund gives access to the 101st-to-200th non-financial largest companies on the NASDAQ Composite. It is a new ETF that started trading in October.
By comparison, the S&P 500 index and the Dow Jones Industrial Average are up 13.4% and 5.3%, respectively. Those investors looking for ETFs that follow these two indices may want to research the SPDR S&P 500 (NYSE:SPY) and the SPDR® Dow Jones Industrial Average ETF Trust (NYSE:DIA). Although not as tech heavy as QQQ, these funds also hold many tech names that are found in all three widely-followed indices. We should note that, in addition to any potential capital growth, SPY and DIA would also pay dividends, which currently stand around 1.55% and 2%, respectively.
Recently, however, as news of the availability of coronavirus vaccines to fight the pandemic began making headlines, and hopes of a return to normal for populations and the global economy begin to take hold, investors appear to be cycling out of overpriced technology shares and into value stocks that have been pummeled by economic downturn.
This could create a buying opportunity for investors looking to add technology shares to their portfolios at a better entry point.
The Tech Industry Is Growing Fast
Recent research led by Charles S. Gascon of the Federal Reserve Bank of St. Louis shows how in the past three decades,
"The US economy has undergone a profound technological revolution… Innovations in digital computing systems and automation have triggered tectonic shifts in consumer and business behaviors across the economy… The technology sector comprises industries that are primarily focused on developing and producing advanced technology for the rest of the economy… [It] has a dynamic history of expansion and contraction."
Industry numbers agree with this research's conclusions. For instance, CompTIA, a global tech association, cites:
"In 2020, the global information technology industry took a small step back in terms of overall revenue. As of August 2020, the research consultancy IDC was projecting global revenue of $4.8 trillion for the year, compared to their original estimate of $5.2 trillion… The United States is the largest tech market in the world, representing 33% of the total, or approximately $1.6 trillion for 2021."
Seasoned investors would also agree that many tech stocks are also known for their stomach-churning, short-term volatility.
If the much vaunted cyclical rotation picks up speed in the coming weeks, and tech stocks continue to decline, consider buying the dips in individual tech stocks or an ETF that tracks a tech index such as QQQ or QQQJ.
As well, here's another tech fund that could appeal to a range of market participants:
ARK Innovation ETF
- Current Price: $123.84
- 52-Week Range: $33.00 – $125.84
- Dividend Yield: N/A
- Expense Ratio: 0.75%
The ARK Innovation ETF (NYSE:ARKK) provides access to global businesses that may be in the forefront of advancement in technology and scientific research.
Such companies may focus on genomics, automation, robotics, Internet of Things (IoT), financial technology (fintech), e-commerce, machine learning, and alternative energy. Fund managers regard these businesses to be among the “disruptive innovators.”
As an actively managed fund, ARKK’s number of holdings range between 35 and 55. The fund started trading in October 2014 and has close to $9 billion in assets.
In terms of current sectoral breakdown, health care tops the list with 35.5%, followed by information technology (28.7%), communication services (16.5%), consumer discretionary (11.1%), financials (3.8%), and industrials (3.8%). Close to 50% of the fund's assets are in the top ten stocks.
Electric vehicle (EV) leader Tesla (NASDAQ:TSLA), streaming content platform Roku (NASDAQ:ROKU), genetic testing company Invitae (NYSE:NVTA), Crispr Therapeutics (NASDAQ:CRSP), which is working on gene-based medicines for serious diseases, and fintech group Square (NYSE:SQ) lead the names in ARKK.
Since the start of the year, the fund is up over 147% and hit a record-high on Dec. 11. The returns since late October are around 30%.
Given the recent impressive run-up in price, as well as the on-again/off-again rotation out of some tech stocks, profit-taking in the ETF is likely to come soon.
We should point out that the weighting within the fund of Tesla, which is up close to 630% YTD, is almost 10%. Therefore, potential moves in the car maker, which is set to join the S&P 500 index on Dec. 21, will have a significant effect on the fund.
We believe ARKK would offer better long-term value between $100 and $110.Leave a comment