5 ETFs And Stocks To Ride The Tech Mania

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Includes: AAPL, AMZN, ARKW, ATHM, FB, GOOG, GOOGL, KEM, PSI, SPY, UCTT, WDC, XLK
by: Zacks Funds

The technology sector has been on fire this year thanks to improving economic and industry fundamentals, a rising interest rate scenario, and Trump's proposed corporate tax reform. The sector is leading the broad market rally with the ultra-popular Select Sector SPDR Technology ETF (NYSEARCA:XLK) gaining 15.1% in the year-to-date time frame versus the gain of 7.2% for SPDR S&P 500 (NYSEARCA:SPY).

Below we discuss some strong reasons for the outstanding performance of the sector and their continued outperformance.

Encouraging Fundamentals

Most of the surge came from five technology giants - Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), and Facebook (NASDAQ:FB) - that collectively account for 40% weight in the index. These stocks are scaling new highs this year and are the major beneficiaries of Trump's proposed policies, especially the tax reform, which could allow companies to bring back cash being held overseas at lower rates. Investors should note that 84% of the technology stocks have delivered positive returns this year.

Additionally, the emergence of new technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, and virtual reality devices are fueling growth in the sector. With the global economy gathering momentum, technology companies are likely to outperform and are less susceptible to interest rates or deregulation.

Further, most of the tech companies are sitting on a huge cash pile and are in a position to increase payouts to their shareholders. The cash reserves will ensure that these companies are not plagued by financial trouble in a rising interest rate environment. Adding to the strength is a pick-up in the economy and better job prospects that are giving a solid boost to economically sensitive growth sectors like technology, which typically perform well in a maturing economic cycle.

Massive Fund Flow

Investor's appetite for tech stocks remains strong as money has been flowing into the sector at a faster clip in the last 15 years. The stocks saw solid inflows of about $1 billion in the past week while tech-focused mutual funds and ETFs have gathered new money for 11 consecutive weeks and pulled in about $8.7 billion in capital this year, according to a Bank of America Merrill Lynch report. Notably, XLK saw inflows of $1.4 billion this year compared with outflows of over $11 billion for SPY.

Bullish Bets

Hedge funds are betting heavily on popular technology and Internet stocks, as per the Goldman Sachs Hedge Fund Trend Monitor. Their bullish bets soared to post-crisis highs during the first quarter. The so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google parent Alphabet), which are among the top 10 holdings of most hedge funds portfolio, saw gross and net exposure jump to post-crisis highs of 230% and 73%, respectively.

Earnings Strength

The rally in the sector is supported by its strong earnings expansion in the S&P 500 index, excluding energy, as tech is one of the leading sectors of the S&P 500's profit growth resurgence. This is especially true given that the sector is expected to post earnings growth of 8.3% for this year, a remarkable markup from 1.7% reported in 2016. In comparison, earnings for the S&P 500 index, excluding energy, are expected to grow 4.8%.

Solid Zacks Rank

The upside is further confirmed by the Zacks Sector Rank in the top 38% with about 62% of the industries having their ranking in the top 41%. This suggests continued outperformance in the sector for the coming months. Semiconductors and electronics topped the list.

How to Play?

In view of the reasons discussed above, we strongly believe that investors should consider technology ETFs and stocks in their portfolio. While most of the ETFs and stocks are skyrocketing, we have highlighted five that will continue their outperformance in the coming months as well.

ETFs to Consider

For ETFs, we have focused on either of the two factors: Zacks Rank of #1 (Strong Buy) or #2 (Buy), or the uprising theme. Any of these would continue to show their uptrend.

ARK Innovation ETF (NYSEARCA:ARKK)

This actively managed fund offers exposure to companies that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the genomic, industrial innovation or Web x.0.

Zacks Rank: NA
AUM: $28.2 million
Expense Ratio: 0.75%
YTD Return: 36.4%

ARK Web x.0 ETF (NYSEARCA:ARKW)

This is an actively managed fund focusing on companies that are expected to benefit from the shift in technology infrastructure from hardware and software to cloud.

Zacks Rank: NA
AUM: $29.4 million
Expense Ratio: 0.75%
YTD Return: 32.6%

PureFunds Video Game Tech ETF (OTC:GAMR)

This fund targets the global video game industry of the technology sector, including game developers, console and chip manufacturers, and game retailers.

Zacks Rank: NA
AUM: $11.8 million
Expense Ratio: 0.75%
YTD Return: 32.4%

PowerShares Dynamic Semiconductors Fund (NYSEARCA:PSI)

This fund targets the semiconductor industry of the broad technology sector.

Zacks Rank: #1
AUM: $262.5 million
Expense Ratio: 0.63%
YTD Return: 22.6%

First Trust NASDAQ-100-Technology Sector Index Fund (NASDAQ:QTEC)

This ETF offers equal weight exposure to the tech companies in the NASDAQ-100 Index.

Zacks Rank: #2
AUM: $2.1 billion
Expense Ratio: 0.60%
YTD Return: 21.5%

Stocks to Consider

To pick the stocks in the sector, we have used the Zacks Stock Screener. We narrowed down the list by selecting stocks with a Zacks Rank #1 or #2, a VGM Style Score of A or B, and Zacks Industry Rank in the top 41%.

Ultra Clean Holdings Inc. (NASDAQ:UCTT)

This California-based company is a developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar, and medical device industries.

Zacks Rank: #2
VGM Style Score: A
Market Cap: $722.4 million
YTD Return: 131.2%

Kemet Corporation (NYSE:KEM)

This South Carolina-based company is the world's largest manufacturer of solid tantalum capacitors and one of the world's largest manufacturer of multilayer ceramic capacitor.

Zacks Rank: #2
VGM Style Score: A
Market Cap: $616.2 million
YTD Return: 96%

Autohome Inc. (NYSE:ATHM)

This China-based company offers an online destination for automobile consumers primarily in the People's Republic of China.

Zacks Rank: #2
VGM Style Score: B
Market Cap: $4.95 billion
YTD Return: 68.1%

Applied Materials Inc. (NASDAQ:AMAT)

This California-based company develops, manufactures, markets, and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry.

Zacks Rank: #1
VGM Style Score: B
Market Cap: $47.6 billion
YTD Return: 38.7%

Western Digital Corporation (NYSE:WDC)

This California-based company designs, develops, manufactures, and markets a broad line of hard drives featuring leading-edge technology.

Zacks Rank: #1
VGM Style Score: A
Market Cap: $25.6 billion
YTD Return: 29.5%

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