Once again, the technology sector and tech ETFs are hot in 2019. At the beginning of May, the tech-heavy Nasdaq-100 and S&P 500 Technology indexes were up 22.70% and 27.10%, respectively, year-to-date.
Interestingly, tech ETFs are performing well even against the backdrop of declining net profit margins.
“Ten of the 11 sectors are reporting a year-over-year decline in their net profit margins in Q1 2019, led by the Communication Services (11.5% vs. 13.6%), Energy (4.4% vs. 6.2%), and Information Technology (20.7% vs. 22.3%) sectors,” said FactSet in a recent note.
Fortunately for tech ETFs, the group could be supported by a familiar face: Apple (NASDAQ:AAPL). Apple, often one of the largest holdings in a slew of tech ETFs, recently reported blow-out fiscal second-quarter results. Importantly, the company forecast fiscal third-quarter revenue of $52.5 billion to $54.5 billion, boosted its dividend, added $75 billion to its repurchase program and forecast a gross margin of 37% to 38% for the current quarter.
With the growth factor still largely in favor, investors may be able to find more upside through the rest of 2019 with some of the following tech ETFs.
Fidelity MSCI Information Tech ETF (FTEC)
Expense ratio: 0.0840% per year, or $8.40 on a $10,000 investment.
Tech ETFs can be more volatile than some other sector funds, but there is strong evidence confirming long-term investors are rewarded by sticking with tech. And if you’re going to hold a tech ETF for the long haul, you ought to do that in cost-effective fashion. The Fidelity MSCI Information Tech ETF (NYSEARCA:FTEC) is one way of accomplishing that objective as it’s the cheapest tech ETF on the market today.
Home to 308 stocks, FTEC is a basic and broad tech ETF. The fund is cap-weighted, so heavyweights, such as Apple and Microsoft (NASDAQ:MSFT) dominate the fund. Those two stocks combine for nearly 31% of FTEC’s weight. None of the fund’s other holdings command weights north of 3.55%. Frugal investors get another benefit with FTEC: they can trade the tech ETF commission-free on Fidelity’s platform.
FTEC is up nearly 28% year-to-date and resides near all-time highs, but Microsoft could soon provide this tech ETF with another boost. Next week, Microsoft holds a meeting in Seattle and analysts are expecting some important commentary regarding the company’s booming cloud business.
Oppenheimer analyst Timothy Horan “sees Microsoft’s heavy investments in artificial intelligence and the Internet of Things as important factors that could create demand for cloud-computing capacity over the next decade. Sales at the company’s Azure cloud-computing segment soared 73% year over year in the fiscal third quarter,” reports Barron’s.
First Trust NASDAQ Technology Dividend Index Fund (TDIV)
Expense ratio: 0.50%
As noted above, Apple recently boosted its dividend. Microsoft has been a stout dividend grower in its own right in recent years. In other words, there are plenty of opportunities for dividend growth investors in the technology sector and the First Trust NASDAQ Technology Dividend Index Fund (NASDAAQ:TDIV) is the tech ETF dedicated to that theme.
“Tech giants spent a combined $50 billion on dividends last year. Dividend growth was one percentage point higher than the previous year, but smaller than the acceleration in 2016,” according to Bloomberg.
TDIV does not have a dividend growth qualification per say, but the tech ETF requires components to have a dividend yield of at least 0.50% and to have paid a dividend over the past year while excluding companies that cut or suspended payouts. This $999.3 million tech ETF is up nearly 21% year-to-date.
Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE)
Expense ratio: 0.35%
The widely followed Nasdaq-100 Index is not a dedicated technology benchmark, but it is pretty close. Investors looking for reduced single-stock risk while still getting access to the Nasdaq-100 may want to consider an equal-weight tech ETF, such as the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEARCA:QQQE).
QQQE follows the NASDAQ-100 Equal Weighted TR Index, the equal-weight equivalent of the Nasdaq-100 Index. None of QQQE’s holdings exceed weights of 1%. That’s right: 1% is the weight this tech ETF assigns to the likes of Apple and Microsoft.
This data point may surprise some tech investors: QQQE is actually trading slightly ahead of the cap-weighted Nasdaq-100 this year. While QQQE does not always outpace the cap-weighted Nasdaq-100, it is worth nothing the equal-weight tech ETF’s maximum drawdown over the past three years was significantly lower than that of the cap-weighted benchmark.
Global X Cloud Computing ETF (CLOU)
Expense ratio: 0.68%
Having debuted just last month, the Global X Cloud Computing ETF (NASDAQ:CLOU) is the newest tech ETF highlighted here. It is also the second dedicated cloud computing ETF in the U.S. CLOU, which is actually pricier than the established fund it competes against, tracks the Indxx Global Cloud Computing Index.
However, CLOU does not allocate more than 5.48% of its weight to any of its holdings and the overlap between CLOU and the competing fund is just 17% by weight, meaning this new tech ETF can potentially deliver significantly different returns than its older rival. With cloud computing, investors are tapping a fast-growing niche.
“The global cloud computing market is estimated to be worth well-over $300 billion by 2022, up from about $188 billion today and growing at a compound annual growth rate (CAGR) of 14.6%,” according to Global X research. “And while cloud computing is primarily a business innovation, it has had massive implications for how products and services are delivered to customers, from social media and video streaming to education platforms and gaming.”
VanEck Vectors Semiconductor ETF (SMH)
Expense ratio: 0.35%
The strength of semiconductor stocks has been a major boon for tech ETFs this year. Just look at the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH), which is up 32.17% year-to-date. Semiconductor companies are highly cyclical and with the group up so much to start to 2019, some market observers have concerns about the rally’s veracity.
There might be something to that prognosis simply because global semiconductor demand hit a record high last year, meaning 2019 comp’s will be tough for the industry to top. Additionally, some analysts see global chip demand as still in a downturn, one that may not be broken until next year, given historical downturn trends in the semiconductor space.
The good news for tech ETFs and dedicated semiconductor plays, such as SMH, is that emerging technologies, such as 5G and artificial intelligence, are expected to bolster chip demand.
Todd Shriber does not own any of the aforementioned securities.