ETFs: Analysts see buying opportunity in tech stocks sell-off

By: Anton Aleksandrov
Anton Aleksandrov
Anton is a freshly graduated economist from the States with passion for the world of finance. He is one… read more.
on Apr 8, 2014
Updated: Oct 21, 2019

iNVEZZ.com Tuesday, April 8: Technology stocks have been battered since the start of April, prompting some analysts to see bargain opportunities. The Technology Select Sector SPDR (NYSEArca:XLK) has lost almost 1.2 percent in the month-to-date, the iShares US Technology ETF (NYSEArca:IYW) has declined by about 1.5 percent and the Vanguard Information Technology Index ETF (NYSEArca:VGT) has dropped 1.61 percent.

The S&P 500 index plunged 2.2 percent on Friday, the worst decline in almost a year, recording a second consecutive weekly loss. Shares of Twitter, Pandora, Netflix, Facebook and Amazon are all down by more than 20 percent from highs earlier this year. The causes of the sell-off can be traced back to worries over inflated valuations, discouraging US economic indicators, geo-political concerns, the possibility of an US interest rate hike and the Fed’s QE tapering. As a response, investors have shifted away from ‘momentum’ stocks with high betas – meaning they tend to rise faster than the benchmark indexes –and towards shares with lower betas.

Oppenheimer & Co analysts see last week’s decline as an opportunity to get back into some tech companies. “In our view, the recent sell-off in high-beta Internet and technology stocks has created a buying opportunity in certain stocks in our coverage universe. As we view near-term fundamentals as unchanged, we are upgrading the shares of NFLX [Netflix] and YELP [Yelp] to Outperform from Perform. Based on prior price target calculations, we estimate 24% and 19% upside, respectively, with favorable near-term technical support,” analyst Jason Helfstein has commented.

However, the price-to-earnings (P/E) ratios on some of the tech giants are still well above the broader market. For example, Netflix’s P/E is 182.2, Facebook’s is 92.8 and LinkedIn’s is 743 over the trailing 12-month period, while the S&P 500’s P/E is 18.6. The lofty valuations could be hard to justify if the companies disappoint in the first quarter earnings season.

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Oppenheimer suggests that a good way to bet on the US tech sector is by buying a portfolio which assigns each company an equal weight instead of overweighting larger companies. One such exchange traded fund is the Guggenheim S&P Equal Weight Technology ETF (NYSEArca:RYT), which follows an equal-weight indexing methodology and is up by 1.77 percent in the year-to-date. The fund has total net assets of $571.45 million (₤342 million) and a gross expense ratio of 0.40 percent. None of the 66 stocks included in the ETF has a weighting of more than two percent.

**As of 13.15 UTC buy Technology Select Sector SPDR at $35.65.**
**As of 13.15 UTC sell Technology Select Sector SPDR at $35.63.**
**As of 13.15 UTC buy iShares US Technology ETF at $88.86.**
**As of 13.15 UTC sell iShares US Technology ETF at $88.84.**
**As of 13.15 UTC buy Vanguard Information Technology Index ETF at $89.12.**
**As of 13.15 UTC sell Vanguard Information Technology Index ETF at $89.10.**
**As of 13.15 UTC buy Guggenheim S&P Equal Weight Technology ETF at $78.20.**
**As of 13.15 UTC sell Guggenheim S&P Equal Weight Technology ETF at $78.18.**

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