Forget FANG Woes With These Tech ETFs

After rebounding strongly from an early February market selloff, the technology sector is once again caught in wild trading thanks to the decline in FANG stocks. This is especially true as the NYSE FANG index, which tracks the 10 biggest and most active tech stocks in the world, slipped into correction territory from its Mar 12 peak.

As a result, New Tech and Media ETF (AS:FNG) , which offers similar exposure to investments in high-performing technology and media leaders as characterized by the FANG acronym, lost 7.9% over the past 10 days while the ultra-popular Technology Select Sector SPDR Fund XLK shed 7.3%.

What Happened?

The initial panic was created by the social media giant Facebook (NASDAQ:FB) following the data breach report that sparked concerns about data privacy and security, and will likely lead to increased scrutiny and possible regulatory pressure. Then trade war fears between the two largest economies, United States and China, accelerated the sell-off as most of the tech companies do business outside the United States and are highly vulnerable to trade disputes (read: 4 Tech ETFs That Tumbled Most on Facebook Data Scandal).

Even though fears of trade war eased the next day and led to a sharp rise in the sector on Mar 26, a slew of negative news again sent the sector into a tailspin on Mar 27. Notably, the NYSE FANG index tumbled 5.6% on the day and eroded about $180 billion in market value from the index. NYSE FANG is down 6% since last week, marking the worst plunge ever.

The latest plunge came as Nvidia (NASDAQ:NVDA) tumbled 8% after it announced the suspension of self-driving tests, raising concerns over the new growth areas in the space. Twitter (NYSE:TWTR) also dropped 12% on expectations of further regulation on its social media platform while Tesla (NASDAQ:TSLA) touched a one-year low on Moody’s downgrade. All these news have raised concerns over the growth of the hottest technology trends like autonomous cars and artificial intelligence.

Solid Sector Outlook

The long-term outlook for the sector remained promising given the twin tailwinds of Trump’s tax reform plan and a rising interest rate scenario. This is because tech titans hoard huge cash overseas and are poised to benefit the most from reduced tax rates. These companies are sitting on a huge cash pile and are in a position to increase payouts to their shareholders. Additionally, the sector’s cyclical nature will allow it to perform well in a maturing economic cycle.

Further, the emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, and artificial intelligence as well as strong corporate earnings are acting as the key catalysts (see: all the Technology ETFs here).

Given this, investors should move on to the tech ETFs that employ some unique/smart approach or have less exposure to the big players. Below, we have highlighted some of these and could be excellent bets on bullish industry fundamentals.

SPDR FactSet Innovative Technology ETF XITK

This fund seeks to provide exposure to the most innovative companies with high revenue growth across the technology sector and other industries that deal with technology, such as electronic media. It follows the FactSet Innovative Technology Index, charging investors 45 bps in annual fees. Holding 99 securities, the product has an equal weight exposure across each security with a concentrated exposure to small caps at 51%. Mid caps take 29% share while large caps take the remainder. It has gathered $13.5 million in AUM and trades in paltry volume of 3,000 shares.

SPDR S&P Internet ETF XWEB

This product targets the Internet corner of the broad tech space and tracks the S&P Internet Select Industry Index. It holds 68 stocks in its basket with an equal-weight exposure of around 2%. The ETF has a huge focus on small-cap securities at 65% while mid caps account for 23%. It has accumulated $3.9 million in its asset base and charges 35 bps in fees from investors. It trades in a light volume of under 1,000 shares a day on average and carries a Zacks ETF Rank #3 (Hold) (read: Top Performing Tech ETFs of 2018).

PowerShares S&P SmallCap Information Technology Portfolio PSCT

This fund offers exposure to the small-cap segment of the technology sector by tracking the S&P SmallCap 600 Capped Information Technology Index. It has managed $432.4 million in its asset base and trades in light average daily volume of about 38,000 shares. The ETF charges 29 bps in fees per year from investors. Holding 95 securities in its basket, the product is well spread across securities with each holding no more than 3.54% share. It has a Zacks ETF Rank #3 with a High risk outlook.

Guggenheim S&P Equal Weight Technology ETF (BE:RYT)

This ETF offers equal-weight exposure to 70 tech firms by tracking the S&P 500 Equal Weight Index Information Technology Index. Each firm accounts for less than 1.6% share in the basket. Though RYT invests 72% in large caps, its equal allocation makes its safe from the large swings in a particular stock or a group of stocks. It has amassed $1.6 billion in its asset base while trades in moderate volume of around 69,000 shares. The fund charges 40 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Is the Rout in Tech ETFs Transitory?).

First Trust Technology AlphaDEX Fund (AX:FXL)

This fund follows an AlphaDEX methodology by tracking the StrataQuant Technology Index and ranks stocks in the space by various growth and value factors, eliminating the bottom-ranked 25% of the stocks. The approach results in a basket of 79 stocks that are well spread out across each security with none holding more than 2.93% of assets. From a market-cap look, mid caps account for 52% share while large caps take the remainder. The fund is rich with AUM of $1.9 billion and average trading volume of around 343,000 shares. It charges 63 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.



Bottom Line

While the above-mentioned ETFs have been victims of the tech selloff, these have easily outperformed XLK and FNG in the past month.

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Facebook, Inc. (FB): Free Stock Analysis Report

Twitter, Inc. (TWTR): Free Stock Analysis Report

Tesla, Inc. (TSLA): Free Stock Analysis Report

SPDR-TECH SELS (XLK): ETF Research Reports

GUGG-SP5 EW TEC (RYT): ETF Research Reports

PWRSH-SP SC IT (PSCT): ETF Research Reports

SPDR-FS INV TEC (XITK): ETF Research Reports

SPDR-SP INTRNT (XWEB): ETF Research Reports

FT-TECH ALPHA (FXL): ETF Research Reports

NVIDIA Corporation (NVDA): Free Stock Analysis Report

ADVS-NW TEC MDA (FNG): ETF Research Reports

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