The Technology Select Sector SPDR (NYSEArca: XLK) was one of the better-performing sector SPDR exchange traded funds last year, an impressive feat given weakness in shares of Apple (NasdaqGS: AAPL), XLK’s largest holding.
However, XLK and rival technology ETFs have not been immune to the market slide that has afflicted investors in early 2016. Over the past five days, XLK, the largest technology ETF by assets, is lower by 6.6%.
The FANG stocks — Facebook (NasdaqGS: FB), Amazon (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX) and Google or Alphabet (NasdaqGS: GOOG) – among others, drove technology ETFs higher last year, but that left investors wondering if the same feat will be repeated in 2016. On a more positive note, XLK’s long-term uptrend is still in tact.
“Taking a look at the four-year chart below, you can see that the fund has been trading within an established uptrend and that the bulls are clearly in control of the direction. From an active trader’s perspective, it is interesting to note how the price has tested the support of the 200-day moving average and an ascending trendline several times,” according to Investopedia.
ETF investors could also begin to shift away from top heavy, market capitalization-weighted index funds for ETF options that equally weight components, like the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEArca: QQQE) and the First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGS: QQEW).
Equal-weight ETFs do not feature the large allocations to tech titans such as Apple and Facebook that are found in traditional tech funds, meaning investors can experience less downside when the largest tech names retreat.
“These levels have prevented the trend from reversing in the past, which is what many will be looking for again. From a risk management perspective, bullish traders will likely set their stop-loss orders directly below the trendline and moving average in an attempt to maximize the risk-to-reward ratio of the trade,” adds Investopedia.
Technology Select Sector SPDR
Tom Lydon’s clients own shares of Apple.