The technology sector, the largest sector weight in the S&P 500, has stumbled a bit to start 2015 with big-name technology exchange traded funds slightly trailing the benchmark U.S. index. Modest under-performance through the first six weeks of the year should diminish the allure of mature technology companies and the ETFs that feature heavy allocations to those stocks.
Outside of Apple (NasdaqGS: AAPL) and its recently reported blowout earnings, there has not been much to crow about this year for tech stocks and ETFs like the iShares U.S. Technology ETF (NYSEArca: IYW), but opportunity remains with funds focused on sturdy, “old school” tech giants.
“Investors are increasingly likely to embrace growth sectors such as tech as the economic cycle matures. And the cash-rich balance sheets of the largest tech companies could potentially help them withstand increased borrowing costs should the Fed raise rates this year,” said BlackRock Global Investment Strategist Heidi Richardson in a recent note. [Mature Tech Stocks Earn Respect]
The point about tech’s allure even if the Fed does raise later this year is important because the sector is historically one of the better performers in rising rate environments. Equally as important is mature tech’s growing reputation as a value sector, particularly at a time when valuations on defensive sectors, such as consumer staples and utilities, and the controversial energy sector appear stretched.
“We think U.S. tech valuations look reasonable now. That said, given our expectations for continued volatility in the year ahead, you can also look to market pullbacks for other attractive entry points,” adds Richardson.
Tech, one of the few sectors that has not seen valuations noticeably appreciate since 2009, trades at a slight discount to the S&P 500, an anomaly for a sector that has historically been pricier than broader benchmarks.