The technology sector has been the best-performing sector this year with the ultra-popular Select Sector SPDR Technology ETF (NYSEARCA:XLK) gaining 26.2% in the year-to-date time frame versus the gain of 15.7% for SPDR S&P 500 ETF (NYSEARCA:SPY).
The outperformance came on the back of soaring FAANG stocks — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX), and Alphabet Inc (NASDAQ:GOOGL). The emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones and virtual reality devices as well as strong corporate earnings are acting as key catalysts.
With the global economy gathering strong momentum, technology stocks will continue to outperform and are less susceptible to interest rates or deregulation. The twin tailwinds of Trump’s tax reform plan and a rising interest rate scenario are driving the stocks higher. This is because the tech titans hoard huge cash overseas and are poised to benefit the most from Trump’s proposed tax reform policy. In fact, the top five U.S. hoarders are Apple, Microsoft Corporation (NASDAQ:MSFT), Alphabet, Cisco Systems Inc (NASDAQ:CSCO) and Oracle Corporation (NYSE:ORCL) that hold 88% of their money overseas, according to Moody’s.
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.
If this wasn’t enough, tech is one of the leading sectors of the S&P 500’s profit growth resurgence. The sector is expected to post earnings growth of 9.2% for this year, reflecting a remarkable markup from 1.7% growth reported in 2016.
That said, there are many funds that have outpaced XLK from a year-to-date look. However, we have highlighted five of these that seek to track the hottest technology trends and have been overlooked by investors due to their lower AUM of under $50 million.
Overlooked Technology ETFs: ETFMG Video Game Tech ETF (GAMR)
ETFMG Video Game Tech ETF (NYSEARCA:GAMR) targets the global video game industry of the technology sector including game developers, console and chip manufacturers, and game retailers (read: Here’s What Investors Need to Know About Soaring Semiconductor ETFs).
Zacks Rank: NA
AUM: $40.2 million
Average Daily Volume (approx): 16,000 shares
Expense Ratio: 0.75%
YTD Return: 49.8%
Overlooked Technology ETFs: Global X FinTech ETF (FINX)
Global X FinTech ETF (NASDAQ:FINX) invests in companies on the leading edge of the emerging financial technology sector, which encompasses a range of innovations helping to transform established industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions.
Zacks Rank: NA
AUM: $21.3 million
Average Daily Volume (approx): 15,000 shares
Expense Ratio: 0.68%
YTD Return: 46.1%
Overlooked Technology ETFs: SPDR FactSet Innovative Technology ETF (XITK)
SPDR FactSet Innovative Technology ETF (NYSEARCA:XITK) 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.
Zacks Rank: NA
AUM: $7.9 million
Average Daily Volume (approx): 3,000 shares
Expense Ratio: 0.45%
YTD Return: 35.6%
Overlooked Technology ETFs: SPDR S&P Internet ETF (XWEB)
SPDR S&P Internet ETF (NYSEARCA:XWEB) targets the Internet corner of the broad tech space with equal-weight exposure.
Zacks Rank: #2 (Buy)
AUM: $3.7 million
Average Daily Volume (approx): 200 shares
Expense Ratio: 0.35%
YTD Return: 28.8%
Overlooked Technology ETFs: iShares Edge MSCI Multifactor Technology ETF (TCHF)
iShares Edge MSCI Multifactor Technology ETF (BATS:TCHF) targets companies with the potential to outperform the broad U.S. technology sector and focus on proven drivers of return: inexpensive stocks, financially healthy firms, trending stocks and relatively smaller companies.
Zacks Rank: #2
AUM: $3.8 million
Average Daily Volume (approx): 1000 shares
Expense Ratio: 0.35%
YTD Return: 27.8%
Good Bet Versus Big Names
Though the above-mentioned ETFs have a big liquidity issue, they seem better positioned compared to the popular ones. This is because the leading FAANG stocks have left behind in the current market rally as short sellers have ramped up their bets against the group in recent weeks on concerns over their size, market weighting and valuations.
Per the latest numbers from financial analytics firm S3 Partners, short sellers increased their net positions in the five FAANG stocks by 7.6% from Aug 15 to Sep 28. As the FAANG rally cools off, tech ETFs having less exposure to big players seem excellent bets on bullish industry fundamentals.
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