Tech ETFs: Historic Buying Opportunity or Poor Choice in the Recession?

It was only two-and-a-half weeks ago when I thought that I might write about possibilities for tech ETFs. I hadn't yet felt that the time had come to recommend them, but I did discuss the historically low valuations of large-cap leaders like Microsoft (MSFT) and Intel (INTC).

So instead, I wrote a cheeky article about a bet against the bears. On March 6, I suggested that "traders" look to win big with the leveraged ETFs Ultra Tech (QLD) and Ultra Financials (UYG).

Obviously, "traders" have been richly rewarded. And may I remind them... my short-term "call" was intended for quick profits. So take them soon!

However, the majority of my readership is interested in smarter, more balanced investing. They want to know how ETF can make their long-term goals easier. That is why I think it is important to come back to the fundamentals once more.

Simply put, the forward price tag (P/E) for most technology stocks has not been this cheap... ever. According to Yahoo Finance, the iShares Dow Jones Technology Index Fund (IYW) trades at a multiple of 16-17 whereas the 5-year average P/E may approximate 25. Morningstar suggests that... according to its fair value estimate... IYE should fetch $64. It currently fetches $54.

Granted, seasonal trends do not bode well for tech investing from mid-February to early August. Yet, even this notion is debatable. For one thing, the traditional tech season of September through January has provided nothing but misery for 2007-2008. Secondly, Birinyi Associates reported that the tech sector outperformed the S&P 500 52% of the time in the individual years since 1962.

Perhaps we can ignore seasonality when the economy is the primary issue here. How would tech fare in the springtime and summertime months of a recession?

In the 2001 recession, technology was cream-corned. Then again, this had far more to do with the over-inflated tech bubble that burst in March of 2000 and continued for 3 years. Even as the 2003-2007 bull market progressed, the P/E ratio for tech continued to drop, suggesting that valuations took 7 years to get back to a norm.

Now, however, tech has been beaten down sufficiently in price, in anticipation of the recession. Potentially, this might lead the prices to be "bid up" in anticipation of a recovery. And if the quarterly performance numbers for stalwarts like IBM (IBM) and Cisco (CSCO) mean anything, IYW could be a big beneficiary.

Yet perhaps one of the biggest reasons to consider large cap U.S. tech is the fact that most of them derive a great deal of their profits from overseas. The vast majority of PCs, "i-products," golf gadgets and cell phones are sold abroad.

From yet another perspective, the record lows for the U.S. dollar only helps US technology companies selling globally. And major tech companies are not lining up to lower Q4 guidance. In fact, most will meet or beat expectations when all is said and done.

Beaten up tech? Yeah... you bet. It's not that it will rally to new highs overnight. But in a shallow recession where many may need to invest in tech to keep other costs down, it makes sense to slowly add to diversified global players.

One way to do it? The iShares Dow Jones Technology Index Fund (IYW). Or if one prefers, one might look to the S&P Global Technology Fund (IXN).