Instead of scouring the markets in search of yields for extra returns, investors can turn to large-cap growth stocks, like the prominent tech names and related-sector exchange traded funds.
“There is a long way to go here. People have been chasing in the search for yield dividend stocks, corporate bonds and so on, that’s the wrong place to be,” Charlie Morris, HSBC Global Asset Management’s head of absolute return, said on CNBC. “The right place to be is in growth and you know U.S. large cap growth is the theme.”
Year-to-date, the Technology Select Sector SPDR (NYSEArca: XLK) rose 19.6%, Vanguard Information Technology ETF (NYSEArca: VGT) gained 19.2% and iShares U.S. Technology ETF (NYSEArca: IYW) increased 21.1%. In contrast, the S&P 500 index is up 14.3% so far this year. [Getting Strategic With Sector ETFs]
Supporting the forward momentum in the tech space, company earnings remain strong. Jasper Lawler, market analyst at CMC Markets, argues that as companies generate strong earnings, the sector can justify its slightly higher valuations.
“I think that that idea that the tech is a bubble is wrong. It is actually making a lot of money, a lot of these companies are very, very profitable and it will continue to go higher next year,” Morris added.
Looking at the underlying valuations, the tech sector ETFs remain inline with the broader equities market. XLK has a 17.8 price-to-earnings and 3.7 price-to-book, VGT has a 18.1 P/E and a 3.6 P/B. IYW has a 18.4 P/E and 3.8 P/B. In comparison, the S&P 500 index shows a 18.0 P/E and 2.5 P/B.
Tech analysts point to sturdy tech names like Apple (NasdaqGS: AAPL) and Microsoft (NasdaqGS: MSFT), well-established companies that generated steady growth. Some observers also warn against newer brands like Alibaba (NYSE: BABA) where traders are betting on short-term momentum.