We’re more than five months into 2022, and investors are hearing plenty about the erosion of technology stocks. Within that realm, disruptive or innovative names are enduring the brunt of the punishment.
It’s easy to understand why. Many of the stocks on the disruptive technology side of the ledger are far removed from large-cap territory, and plenty aren’t yet profitable — not exactly enviable traits in the current market climate.
Still, some market observers argue that now isn’t the time for investors to abandon the disruptive growth ship. Those with longer time horizons may be rewarded by exchange traded funds such as the Goldman Sachs Future Tech Leaders Equity ETF (GTEK).
The actively managed GTEK “invests in technology companies with market capitalizations of less than $100 billion, seeking to give investors exposure to the next generation of potential tech leaders,” according to Goldman Sachs Asset Management (GSAM).
One of the primary reasons that GTEK and its peers are sagging this year is the Federal Reserve boosting interest rates. The downside of that is that higher borrowing costs pressure innovative growth and tech stocks. The good news is that eventually the Fed will get inflation under control or back off rate hiking for fear of stymieing economic growth.
“Many high-growth companies that invest heavily in products and sales capacity are longer duration assets with a higher portion of their projected cash flow generation further into the future than is the case with more stable growth and value companies. These stocks have recently undergone a significant contraction of their price/earnings multiple,” noted BNP Paribas.
GTEK isn’t a dedicated tech ETF, but it is undoubtedly a growth-centric fund. The Goldman Sachs fund allocates 77.3% of its weight to tech equities, while the communication services and consumer cyclical sectors combine for 15.8%, confirming the fund’s growth emphasis. None of GTEK’s holdings exceed a weight of 3.3%.
While those are epicenters of equity market weakness this year, investors with longer time horizons shouldn’t forget that those sectors are also epicenters of disruptive growth. That could indicate that there’s still a solid foundation for growth with GTEK.
“Despite these risks, we see many reasons for optimism. We are confident in several long-term secular growth themes that are driving the digital transformation of the economy. We believe companies will continue to invest if they see digital transformation as an imperative to remaining competitive,” concluded BNP Paribas.
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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.