• Wed. Sep 23rd, 2020

Dimancherouge

Technology

Two key ETFs to watch as technology stocks lose momentum

Tech stocks are losing steam.

The group resumed its multi-session sell-off on Thursday after a brief reprieve, dragging the major averages into the red for the day.

Parts of tech, particularly software and online retail, mounted a major recovery early in the day’s trading before cooling off into the close. Crowdstrike’s stock eked out a nearly 1% gain. Shares of e-commerce companies Overstock and Wayfair ended trading 8% and 2% higher, respectively. 

Those two groups are worth watching in this strained moment for tech stocks, which many see as having overly high valuations, said Tom Lydon, CEO of ETF Trends and ETF Database.

“We’re in a new world for the average business out there in America,” he told CNBC’s “ETF Edge” on Thursday. “Two-thirds of the GDP is based on small businesses that are changing what’s going on. They’re embracing technology. They’re embracing software.”

The largest software-focused ETF on the market is the iShares Expanded Tech-Software Sector ETF (IGV), with nearly $5 billion in assets under management and a 29% gain for the year. Another top software pure play is the SPDR S&P Software & Services ETF (XSW), a more than $250 million fund up more than 14% year to date.

At the same time as small businesses are embracing software, price-earnings multiples for software stocks are admittedly “going through the roof,” Lydon said. “The tech sector itself is at about 31 times, but many of the components here are triple digits on their PEs and many don’t show earnings.”

But inflated multiples don’t necessarily erase the growth story, he added.

“The average entrepreneur that has had to embrace technology is not heading back anytime soon,” Lydon said.

As for online retail, WallachBeth Capital’s Andrew McOrmond said earnings should cushion the blow for that subsector.

“Earnings are going to prevent it from having a real dip,” he said in the same “ETF Edge” interview, referring to Amplify’s Online Retail ETF (IBUY).

IBUY, now the largest retail ETF on the market with more than $800 million in assets under management, counts Peloton, Revolve, Overstock, Carvana and Stitch Fix among its top holdings. Those top five account for almost 20% of the portfolio.

Peloton posted far better-than-expected fiscal fourth-quarter earnings on Thursday, saying sales of its bikes and treadmills surged 172% from the prior year.

“We like IBUY,” McOrmond said. “It’s a global ETF, so, not all good tech and online is in the U.S. … and the ETF itself has momentum.”

IBUY closed about 1% lower on Thursday. XSW fell more than 1%.

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