The stock market is in selloff mode right now. The only two things the market cares about — the trade war and interest rates — aren’t progressing as hoped. Trade tensions between the U.S. and China have escalated over the past few days, with U.S. President Donald Trump implementing new tariffs on more Chinese goods, and China responding by playing currency manipulation games directly aimed at hurting the U.S. At the same time, the Fed has expressed a more hawkish than expected tone with respect to future rate cuts.
In response, stocks — which marched 10% higher in June and July to all-time highs without ever retreating more than 2% — have dropped 5% through the first few trading days of August.
In the big picture, this sell-off is nothing more than a bull market gut check. It will ultimately pass and soon. By the end of the year, stocks should be materially higher than where they are today.
The recent round of tariffs is just a Trump chest puff in order to get the Fed to lower rates more aggressively. It will work. Renewed trade tensions between the U.S. and China will create more economic cross-currents, which will force the Fed to cut rates more aggressively. Once those rates go lower, Trump will probably pull some of these tariffs off the table because he doesn’t want the trade war to get out of hand ahead of the 2020 election. China will stop playing currency manipulation games because they, too, don’t want things to get out of hand since trade with the U.S. accounts for a significant chunk of their economic activity.
Net net, by the end of the year, you will have reduced trade tensions and lower rates. That’s a winning recipe for stocks, especially growth stocks which thrive in a low rate environment.
As such, growth stocks look like a good buy on this recent dip. By extension, growth ETFs also look a like good buy on this dip. Thus, let’s take a look at six growth ETFs which look good for a second half 2019 rebound rally.
First Trust Nasdaq Cybersecurity ETF (CIBR)
YTD Gain: 21%
Percent off 2019 Highs: 8%
The Big Idea: Cybersecurity spend globally will continue to rise, implying sustained big growth potential for cybersecurity companies, and this ETF gives you broad exposure to the world’s most important cybersecurity stocks.
For the past several years, I have employed a saying which broadly encompasses the bull thesis on cybersecurity stocks: another day, another hack, another reason to buy cybersecurity stocks. Long story short, companies are increasingly accumulating data on their customers and storing that data in the cloud. This data is extremely valuable and often very personal. But because it’s in the cloud, it is subject to being stolen by hackers. Thus, enterprises need to keep spending big on cybersecurity solutions to secure all that data, and the more hacks that happen in the world, the more companies will double down on cybersecurity spend to avoid such hacks.
This is exactly what has happened over the past several years. Every company in the world is collecting and storing more data. But all that data keeps getting compromised. In 2016, Adult Friend Finder, Yahoo and Uber (NYSE:UBER) were the victims of big hacks. In 2017, it was Equifax (NYSE:EFX) and Verizon (NASDAQ:VZ) and in 2018, it was Marriott (NASDAQ:MAR), Twitter (NYSE:TWTR), Under Armour (NYSE:UAA) and Chegg (NASDAQ:CHGG). So far in 2019, the headline hack has been the Capital One (NYSE:COF) data breach, which exposed info on more than 100 million Capital One customers.
As all these hacks have happened, cybersecurity companies have broadly benefited from consistently huge revenue growth. Palo Alto Networks reported 28% revenue growth last quarter. Fortinet was up at 18% revenue growth last quarter. Splunk? 36%. Okta? 50%. Even further, the whole industry has high gross margins, so big revenue growth is paving the path for huge profits at scale one day.
Nothing about this secular growth narrative changes because of the trade war. Instead, the lower rates go, the more the lofty valuations underneath cybersecurity stocks will be justified. As such, the First Trust Nasdaq Cybersecurity ETF (NASDAQ:CIBR) — which is a collection of the market’s most important cybersecurity stocks — should rebound in a big way from today’s 8% selloff and head significantly higher into the end of the year and over the long run.
First Trust Cloud Computing ETF (SKYY)
YTD Gain: 17%
% off 2019 Highs: 9%
The Big Idea: The cloud is the future of all enterprise workloads, yet only 20% of such workloads have migrated to the cloud, paving the path for sustained huge market growth in the long run — and this ETF gives you exposure to the world’s most important cloud stocks.
In the enterprise world, the cloud is the future of everything. Every single enterprise workload — from crafting an email to creating a spreadsheet and everything in between — can and should be done in the cloud, given the cost and convenience advantages of cloud-hosted solutions over on-premise solutions. After all, are we really going back to the era of flash drives?
As such, the inevitable outcome here is that, eventually, 100% of enterprise workloads will be performed in the cloud. Today, only 20% of enterprise workloads have migrated to the cloud. Thus, this secular cloud growth narrative is only one-fifth done.
And that’s just the enterprise side of things. Consider that consumers are also increasingly pivoting to the cloud – think Office 365 or Adobe Photoshop. That’s an entirely separate yet also very large growth vertical which should keep the entire cloud market on a secular uptrend for the next several years.
Consequently, the big growth rates across this industry are here to stay. As they do stick around, cloud stocks will rally and that will drive the First Trust Cloud Computing ETF(NASDAQ:SKYY) significantly higher in the long run.
Near term, escalating trade tensions will have a negative impact of enterprise investment levels, which could temporarily weigh on cloud growth rates. But as mentioned earlier, these escalating trade tensions will inevitably cool, meaning that any weakness here and now will be short lived. Instead, the more important implication is that falling rates will keep cloud stocks on a medium-term uptrend.
iShares Expanded Tech-Software Sector ETF (IGV)
YTD Gain: 22%
% off 2019 Highs: 8%
The Big Idea: Software-as-a-Service (SaaS) stocks are winning investments, and this ETF gives you broad exposure to the world’s best SaaS stocks.
The best way to look at the iShares Expanded Tech-Software Sector ETF (NYSE:IGV) is as a slightly expanded version of the Cloud Computing ETF. When buying IGV, you get the best cloud stocks, plus other SaaS stocks which are supported by similar secular adoption tailwinds and favorable margin profiles.
The big holdings here include Adobe, ServiceNow, Autodesk and Salesforce. What do all these companies have in common? Huge revenue growth, with a majority of that revenue coming from steady subscription models. Big gross margins, which is the result of selling low cost software. And rapidly expanding operating margins, a byproduct of huge revenue growth driving positive operating leverage.
Put those three things together and each of these companies is either currently or has the potential to produce huge profits.
In other words, the core fundamentals underlying IGV are very strong. Those fundamentals are hardly deterred by the trade war. Yet the ETF is 8% off its 2019 highs. This drop will inevitably pass, especially with rates dropping and IGV will roar higher from here into the end of the year.
Global Robotics and Automation Index ETF (ROBO)
YTD Gain: 10%
% off 2019 Highs: 15%
The Big Idea: The automation trend is choppy, but within the next decade, automated technologies will go from niche to mainstream adoption, implying big growth potential for robotics and automation stocks in the long run — most of those winning stocks are packaged into this ETF.
Of all the ETFs on this list, the Global Robotics and Automation Index ETF (NYSE:ROBO) has been the worst performer in 2019. Every other ETF on this list is beating the market year-to-date, with gains in excess of 14%. ROBO, on the other hand, has under-performed the S&P 500 in 2019, rising just 10% year-to-date.
This underperformance won’t last for long. The automation trend is admittedly choppy. Technology isn’t quite there to justify enterprises spending big on automation… yet. Meanwhile, negative robot stigmas remain in the consumer world, so things like self-driving and robotic vacuum cleaners remain niche… for now.
These are temporary phenomena. Eventually, technology will get to a point where automated technologies are good enough (and their value so compelling) that enterprises will pivot wholesale to adopting these technologies. At the same time, there will come a point where things like self-driving have enough evidence of success that consumers will start to trust them in bulk.
In other words, it’s only a matter of time before the automation wave changes our entire society. When it does, robotics and automation stocks — like Nvidia, Zebra, Intuitive Surgical and Rockwell — will soar. All of those stocks are packaged into the ROBO ETF, meaning that ROBO has huge potential long term.
The trade war is just a hiccup in the secular automation growth narrative. As such, with ROBO down 15% due to trade war noise and near-term growth concerns, now looks like a compelling time to buy into this secular growth ETF.
Amplify Online Retail ETF (IBUY)
YTD Gain: 20%
% off 2019 Highs: 7%
The Big Idea: E-commerce and digital services are the future of the consumer economy, and this ETF gives you exposure to all of the most important e-commerce and digital services stocks in the U.S.
The internet has connected the world in ways that it’s never been connected before. In so doing, it has enabled a new digital economy to emerge, which leverages this unprecedented connectivity to allow consumers to essentially do anything from their computers or phones. Need to buy something? Go on the Amazon app. Need to study something? Go to Chegg.com. Want to sell something? Create an account on Etsy.
Pretty much every consumer interaction can now be replicated online. Consumers like this. It’s more convenient. They don’t have to go to the store to shop. They don’t have to go to the library to study.
Yet, e-commerce still only represents 10% of total retail sales in the United States, which is considered one of the more deeply e-retail penetrated markets in the world. As such, there’s still plenty of room for growth left here, the sum of which should drive e-commerce and digital services stocks — and the Amplify Online Retail ETF (NASDAQ:IBUY) — materially higher in the long run.
IBUY is presently 7% off its 2019 highs because of this fear that escalating trade tensions will disrupt the global consumer economy and in turn, weigh on e-retail growth rates. That could happen. But things would need to get a lot worse. At present, the U.S. consumer economy is still firing on all cylinders, thanks to sustained healthy labor conditions. The same is true for many other important consumer economies across the world.
Consequently, near term weakness in IBUY looks like a long term opportunity. This high-growth ETF should rally into the end of 2019 and over the long run.
ETFMG Prime Mobile Payments ETF (IPAY)
YTD Gain: 35%
% off 2019 Highs: 6%
The Big Idea: The consumer economy is becoming increasingly digital, and as it does, that means payments are becoming increasingly digital, too — this growth ETF gives you exposure to all the stocks which are powering this global secular pivot to e-payments.
E-commerce is just one part of the digital economy growth narrative. The other part is e-payments. That is, as consumers increasingly pivot into the digital economy, they are simultaneously adopting non-cash payment methods which support digital transactions.
In plain English, this translates into “consumers are ditching cash for non-cash payment methods, like cards and e-wallets, because they support digital transactions, which are becoming an increasingly big part of the consumption pie”. This dynamic will persist for the foreseeable future. That means big growth for companies which provide these non-cash payment methods. Such companies include Mastercard, Visa, Square and PayPal. All four of those companies reported payment volume growth of 9% or better last quarter.
The Prime Mobile Payments ETF (NASDAQ:IPAY) takes all of these non-cash payment processor stocks and packages them into one asset. Presumably, then, as these stocks all rise concurrently over the next several years with the non-cash payments pivot, IPAY will rise, too.
The near term outlook is equally rosy. As is the case with IBUY, IPAY has dropped over the past few trading days over concerns that escalating trade tensions will dampen global consumer enthusiasm. But this isn’t happening yet. It will take a lot more for this to happen. Trade tensions are more likely to cool going forward, than they are to heat up. As such, the outlook for payments stocks to rally into the end of 2019 is favorable.
As of this writing, Luke Lango was long PANW, SPLK, OKTA, UBER, CHGG, NFLX, AMZN, MSFT, ADBE, PYPL, V and SQ.