Tech ETFs And Stocks Tumble: Time To Buy?

The hot and soaring technology sector saw its worst day since Jun 9. The S&P 500 tech sector dropped 2.6% on Nov 29 as a result of sector rotation, especially to financials.

The dual news of Republicans moving closer to passing of the tax-reform legislation and accelerating U.S. economic growth raised the appeal of financial stocks. Investors flocked to these firms seen benefitting more from a potential reduction in the corporate tax rate. Most of the American tech giants pay lower taxes. According to S&P Global data, tech sector pays an effective tax rate of 18.5% - the third lowest among U.S. large caps (see: all the Technology ETFs here).

Additionally, higher economic growth suggests rising interest rates and inflation, thereby leading to solid bank earnings potential on lending activity.

Market Impact

The tech rout has pushed Wall Street lower. The Nasdaq Composite Index was hit the hardest. The index declined as much as 2.2% on the day, marking the biggest one-day drop in more than three months. In particular, FAANG stocks, which were the biggest contributors to the tech rally this year, fell the most in 22 months with Netflix NFLX down 5.5%, Facebook FB down 4%, Amazon AMZN down 2.7%, Google parent Alphabet GOOGL down 2.4% and Apple AAPL down 2.1%.

The drop in semiconductor stocks following Morgan Stanley's warning intensified the rout. Notably, Philly Semiconductor Index tumbled 4.4% - the biggest daily percentage slide since Dec 1. NVIDIA NVDA witnessed the biggest three-day sell off in 21 months, sliding 6.8% on Nov 29. This was followed by decline of 8.7% for Micron Technology MU, 8.7% for Lam Research LRCX and 7.7% for Applied Materials AMAT (read: Semiconductor ETFs Recoil on Morgan Stanley Warnings).

In the ETF world, Select Sector SPDR Technology ETF XLK shed 2.2% on the day compared with a loss of 0.05% for the broad market fund SPY and 1.7% for Nasdaq ETF QQQ. Semiconductor ETFs declined the most with PowerShares Dynamic Semiconductors Fund PSI and First Trust Nasdaq Semiconductor ETF FTXL plunging 5.6% and 5.1%, respectively.

New Tech and Media ETF FNG offering exposure similar to investments in high-performing technology and media leaders as characterized by the FANG stocks acronym, shed 4.2% on the day. Other terrible performers were PowerShares Dynamic Software ETF PSJ, First Trust NASDAQ-100-Technology Sector IndexFund QTEC, iShares North American Tech-Software ETF IGV andFirst Trust Technology AlphaDEX Fund FXL. These are down more than 3.5%. PSJ and IGV target software industry while QTEC and FXL offer broad exposure to the tech sector.

Sell-Off: A Solid Buying Opportunity

Notwithstanding the slide, technology sector is still the best performing sector this year and will maintain the trend heading into the New Year, given expectations of strong earnings, improved overseas industry demand, and innovative technologies.

The emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality devices, and artificial intelligence will continue to fuel growth of the sector. With the global economy gathering strong momentum, technology stocks will continue to outperform and be less susceptible to interest rates or deregulation.

Though the tech titans will benefit less from corporate tax cuts, they hoard huge cash overseas and are poised to benefit the most from Trump's repatriation policy. Further, a pick-up in the economy and better job prospects will provide a solid boost to economically sensitive growth sectors like technology, which typically perform well in a maturing economic cycle (read: 7 Top-Ranked Tech ETFs on Unstoppable Rally).

Moreover, after a brutal decline, most of the tech stocks have become cheap at current levels, offering a nice entry point for investors. As a result, investors could do some bargain hunting on the stocks or ETFs that have become value picks. The ETFs mentioned above have a Zacks Rank # 1 (Strong Buy) or 2 (Buy), suggesting outperformance in the coming months.

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