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Exciting Tech ETF May Be More Defensive Than It Appears

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Exciting Tech ETF May Be More Defensive Than It Appears

Leveraged exchange traded funds, such as the Direxion Daily Technology Bull 3X Shares (NYSE: TECL), usually aren't viewed as defensive ideas. They certainly aren't long-term trades, but some market observers are highlighting the defensive properties of technology stocks.

What Happened

TECL is designed to deliver triple the daily returns of the Technology Select Sector Index. In effect, TECL is a leveraged play on Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL) because those two stock combine for about 40% of the Technology Select Sector Index.

No, the tech sector hasn't been perfect this year. It's taken some lumps along with other groups at the hands of the coronavirus, but it's also been one of the best-performing groups, a theme some experts see continuing in the back half of the year.

Why It's Important

“While tech earnings have been hit along with everyone else, they are holding up remarkably well,” said BlackRock in a recent note. “This is not surprising. Although the lockdown is crushing spending, tech continues to dominate wallet share, both for individuals and companies. A recent Fortune 500 CEO poll found that 75% of companies plan to increase technology spending.”

TECL is higher by 24% of the past month and since the start of the second quarter, traders added nearly $32 million to the geared tech fund. However, TECL's bearish counterpart – the Direxion Daily Technology Bull 3X Shares (NYSE: TECS) – has inflows of $40.15 million since April 1. Leveraged ETFs are often fertile territory for contrarian bets, but the bullish TECL looks like the way to proceed over the near-term.

“Many of the business and broader societal changes demanded by the virus accelerate existing trends: internet commerce, cloud computing, gaming, streaming and remote communication,” according to BlackRock. “One example: retail e-commerce spending is up nearly 60% year-over-year. While some of this is temporary and should reverse as the crisis fades, many of these trends will remain long after COVID 19 has been defeated.”

What's Next

As for issues that could bring the bearish TECS into focus, politics and rapid developments on the coronavirus vaccine front come to mind. It's hard to see the latter derailing tech, but it could encourage some investors to  embrace riskier sectors, forcing lower allocations to higher quality tech.

Regarding November elections, “it is easy to forget that a potentially seismic election is less than six months away. Depending on the outcome, the policy environment could shift in ways less favorable for large tech firms,” said BlackRock.

 

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