Tech ETFs: Are Valuations Running Out Of Hand?

March 29th at 11:00am by Tom Lydon

Technology exchange traded funds (ETFs) are trading higher as market optimism over up-and-coming social networking sites help lift valuations, but some observers think the hyped-up values are becoming a cause for concern.

Evelyn M. Rusli and Verne G. Kopytoff for The New York Times note that investments in Facebook and Zynga have more than quintupled their implied worth for each company over the last two years. Social shopping site Groupon may launch an initial public offering valued at $25 billion when the company was previously valued at $1.4 billion just last year. [Cloud Computing: Will It Provoke Industry And ETFs?]

Thomas Weisel, founder of an investment bank called the Thomas Weisel Partners Group, is worried that “the pools of capital that are looking at these Internet companies are far greater today than what you had in 2000.” [ETF Options to Gain Indirect Exposure to Facebook.]

However, the only difference between now and 1999 is that there were only 20 tech IPOs launched in 2010 as compared to 308 in 1999. More importantly, today’s tech start-ups have real businesses backed by real revenue streams.

Some investors, though, are concerned that the billions of dollars being pumped into internet start-ups by venture capital groups, hedge funds and private equity won’t be utilized efficiently, and the money may not be put to work responsibly.

If you are one of those skeptics that believes we are in the midst of tech bubble round two, you might want to track the tech sector’s long-term trend line (200-day moving average).  Simply put, if a position is above its individual trend line we consider it safe to be invested.  But once it crosses below that line, it is our signal to sell or stay out. [ETF Trend Following Plan.]

These technology-related ETFs are not filled with start-ups, they hold companies that have been around and could participate in any growth or bubble that might be ahead. Watch the trends.

  • Technology Select Sector SPDR (NYSEArca: XLK)
  • iShares S&P North America Technology (NYSEArca: IGM)
  • PowerShares QQQ Trust (NYSEArca: QQQ)
  • Internet Architecture HOLDRs (NYSEArca: IAH)
  • iShares Dow Jones US Technology ETF (NYSEArca: IYW)

For more information on the tech sector, visit our technology category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.