Macroeconomic headwinds, including elevated inflation and tighter monetary policy courtesy of the Federal Reserve, are weighing heavily on the minds of market participants. Interestingly, tech ETFs and stocks could be ideal avenues for dealing with those challenges.
One point in favor of ETFs such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) over the near-term is following the Fed’s rate hike of 25 basis points earlier this week, expectations are increasing that the central bank will hold off on rate increases for the foreseeable, which is constructive for rate-sensitive tech equities.
QQQ and QQQM track the same index, meaning their lineups are essentially identical, including a 49.20% weight to tech stocks. That could be pertinent to investors here and now because many of the large- and mega-cap tech names residing in these ETFs check some critical boxes, including earnings potency and solid balance sheets.
“We seek companies that can maintain their earnings growth throughout market cycles. Those that compound their earnings by reinvesting them into revenue growth, margin improvement, or share count reduction are effectively compounding returns to shareholders. We look for solid balance sheets and positive free cash flow (essentially a buffer against any shortfalls) as additional key signposts,” noted BlackRock.
Another factor to consider is dividends. While the Nasdaq-100 Index (NDX) – the underlying benchmark for QQQ and QQQM – yields just 0.84%, which implies ample room for growth. Some of the marquee holdings in the Invesco ETFs, including Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT), have young, but impressive track records of payout increases.
“Statistically, a company’s record of and commitment to paying a dividend has instilled a measure of resilience. We find their managements are loathe to cut a dividend and send a negative signal to the market, so dividend growers tend to be well-run companies built to weather diverse markets. Stocks with a history of dividend growth also have tended to fare better in a rising-rate environment versus the highest-yielding stocks,” added BlackRock.
Beyond tech, some of the smaller sector weights in QQQ and QQQM could support an upside for the ETFs as 2023 moves forward. That includes healthcare, which accounts for 6.02% of the funds’ rosters.
“Company earnings in the healthcare sector have historically proved to be recession resilient, and we would expect that precedent to hold in the next recession. This is important in a year in which stock performance is more likely to be driven by earnings, versus last year when returns were driven by multiple contractions,” concluded BlackRock.
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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.