Why It Might Be Time To Buy The Dip In Tech ETFs

Wall Street, which had a pretty strong third quarter, has not seen a smooth opening to the fourth. There was a brutal selloff in early-October, thanks apparently to rising rate concerns, and since then the market has remained edgy. The slump was primarily triggered by tech blues as panic-selling caused a rout in the high-flying tech names like Apple Inc. AAPL, Amazon.com, Inc. AMZN and Alphabet Inc GOOGLGOOG.

In fact, the tech-heavy Nasdaq composite index saw its biggest loss in more than two years on October 10. Along with several analysts, we also believe the vast selloff in tech stocks was just because of overvaluation concerns and investors' indulgence in profit booking.

Technology and Internet-based companies normally record high profit margins. Now, in a rising rate environment, profitability of those companies will be compromised as they will end up paying higher interests on borrowed money. This stretches the stocks' already-hefty valuations.

However, investors should note that this sudden rout in the tech sector seems to be passing and is will longer bear a long-term impact. There are plenty of favorable factors that justify a buy-the-dip-in-tech ETFs. Investors should note that the sector is winning investors back slowly as Invesco QQQ Trust QQQ attracted $425.8 million from October 14 to October 23.

Why The Sector Could Bounce Back Soon

The technology sector has been on sturdier ground, with full-year earnings up 16% in 2017 and expected to grow 21.1 percent in 2018. Rising enterprise spending, the tailwind of tax cuts and emerging technologies like cloud computing, artificial intelligence and big data are the wind beneath the wings of the tech sector.

Investors should note that tech behemoths hoard huge cash overseas and are poised to benefit the most from Trump's repatriation tax policy. Also, investors can expect higher dividend distribution or share buyback from this move. Plus, a pickup in the global economy is great for a cyclical sector like technology.

Goldman Sach's strategists led by David Kostin believe that "computer and software makers are cheaper than they've been historically, and fund managers currently hold fewer tech stocks than their representation in benchmark indexes," as noted in Bloomberg. Goldman sees risks of "overcrowding and outperformance" as exaggerated.

Goldman showed that tech shares traded at a P/E ratio that is 7 percent higher than the S&P 500 index, well under the average premium of 30 percent over the past three decades. If a sector like technology is delivering profit margins twice the broader market, such nominal premium can be justified.

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