What Lies Ahead For Tech ETFs?

Trading volumes are low this week, as no major company is scheduled to report earnings. Also, no major economic data release is scheduled. Moreover, markets will remain closed for Thanksgiving on Thursday and will also close early on Friday. This is expected to further lower the trading volume.

Per a Reuters article, trading volume amounted to 5.67 billion shares in U.S. exchanges on Nov 20, 2017 compared with 6.81 billion average volume over the last 20 trading sessions.

Tech Sector: Best Performer

The tech index has grown around 37% so far this year, led by rallies in major tech companies, compared with the broader market’s (SPDR S&P 500 (MX:SPY) ETF- (AX:SPY) return of 15.6%. For the sake of argument, Apple (NASDAQ:AAPL) has increased 46.8% so far this year, while Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) have increased around 55.4% and 32.8%, respectively, this year.

Internet and the smart phones have become an indispensible part of our lives. Be it home entertainment, getting essentials delivered at your doorstep or staying connected with the world on the go, consumers demand convenience. This explains the impressive performance as the tech sector aims at constant innovation.

Tax Reform Impact

There is increased uncertainty with regard to Trump’s ability to pass the promised legislations relating to tax reform. Although the House approved their version of the bill, there are significant differences in the bill from the Senate’s version. Markets are therefore worried that this could create hindrance in the timely passing of the legislation (read: House Passes Tax Bill: Likely ETF Winners & Losers ).

One significant difference between the two versions is the Senate’s plans to tax stock options when employees receive them and not when they exercise them. This might impact tech companies in a significant way if it passes to become law.

Semiconductor Industry

The semiconductor industry is exhibiting consolidating trends. Per latest reports, Marvell Technology Group Ltd. (NASDAQ:MRVL) announced that it would buy Cavium Inc (NASDAQ:CAVM) for about $6 billion, as it seeks to expand its wireless connectivity business.

Share price of Cavium increased 10.8% at market close on Nov 20, 2017, while that of Marvell increased 6.4% at market close. The semiconductor index increased 1.2%.

In the current scenario, we believe it is prudent to discuss the following ETFs that focus on providing exposure to the tech sector (see all Technology ETFs here ).

Technology Select Sector SPDR Fund XLK

XLK is a relatively cheaper bet on the technology sector. This fund has AUM of $19.4 billion and charges a fee of 14 basis points a year. From a sector look, Software, Internet Software and Services and Technology Hardware Storage & Peripherals have the highest exposure to the fund, with 20.1%, 19.0% and 16.6% allocation, respectively (as of Sep 30, 2017). Apple Inc, Microsoft Corp and Facebook Inc are the top three holdings of the fund, with 14.5%, 10.4% and 7.4% allocation, respectively (as of Sep 30, 2017). The fund has returned 34.3% in a year and 31.5% year to date (as of Nov 20, 2017). XLK has a Zacks ETF Rank of #2 (Buy) with a Medium risk outlook.

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Vanguard Information Technology ETF (HN:VGT)

This fund is one of the most popular bets on the technology sector in the United States. It has AUM of $16.6 billion and charges a fee of 10 basis points a year. From a sector look, Internet Software & Services, Technology Hardware, Storage & Peripherals and Systems Software have the highest exposure to the fund, with 19.6%, 16.1% and 14.3% allocation, respectively (as of Oct 31, 2017). Apple Inc, Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corp are the top three holdings of the fund, with 14.1%, 10.0% and 9.7% allocation, respectively (as of Oct 31, 2017). The fund has returned 37.2% in a year and 36.0% year to date (as of Nov 20, 2017). VGT has a Zacks ETF Rank of #2 with a Medium risk outlook.

SPDR S&P Semiconductor (NYSE:XSD) ETF XSD

This fund is one of the most popular bets on the semiconductor industry in the U.S. tech sector. It has AUM of $375.6 million and charges a fee of 35 basis points a year. Cree Inc. (NASDAQ:CREE) , Micron Technology Inc. (NASDAQ:MU) and QUALCOMM Incorporated (NASDAQ:QCOM) are the top three holdings of the fund, with 4.1%, 3.8% and 3.6% allocation, respectively (as of Nov 17, 2017). It has 3.3% exposure to Cavium Inc and 3.1% to Marvell Technology (as of Nov 17, 2017). The fund has returned 34.0% in a year and 30.7% year to date (as of Nov 20, 2017). XSD has a Zacks ETF Rank of #1 (Strong Buy) with a High risk outlook.

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Written By: Zacks Investment Research