There’s still a lot to like with the technology sector, and the even better news is that those points of allure are rooted in sound fundamentals.
That’s good news for exchange traded funds like the Goldman Sachs Innovate Equity ETF (GINN). GINN is up a decent 15% year-to-date, but there are reasons to believe that this performance could improve into year-end, and the setup for the fund in 2022 looks impressive.
Tech “boasts impressive profitability—the best across all 11 S&P sectors; it’s positioned well if economic growth continues—even at a slower pace; and it has compelling fundamental underpinnings, as inflating input and labor costs are spurring businesses to accelerate investment in productivity-enhancing technologies,” notes David Kastner of Charles Schwab.
GINN tracks the Solactive Innovative Global Equity Index (Net total Return, Unhedged, USD) and is home to an expansive roster of 464 stocks. The fund isn’t a dedicated tech ETF, but it allocates 34.7% of its weight to that sector, which is overweight for that group relative to the S&P 500 and other widely followed domestic equity benchmarks.
One of the primary reasons to consider GINN as an avenue to tech is that the ETF is loaded with high-quality, highly profitable tech names.
“One of the most important considerations for any sector is its fundamentals—the short- and long-term drivers for revenues and profits,” adds Kastner. “A good yardstick of fundamental strength is return on equity (ROE), which measures how efficiently companies within a sector generate profits relative to shareholders’ equity. The Technology sector has the highest ROE of all sectors, as well as relative to its own historical average; and upward revisions to its expected earnings over the next year have been among the strongest of any sector.”
Examples of high-ROE tech stocks include Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), and Apple (NASDAQ:AAPL). That trio combines for 7.4% of GINN’s roster. None of the fund’s components exceed an allocation of 3%.
Despite the global chip shortage — GINN has exposure to semiconductor stocks, including Nvidia — there’s still reason to believe that tech has ample tailwinds.
“While there is some concern that the current surge in semiconductor production could result in oversupply when high demand is satiated, plans for more rapid spending on cost-saving technologies could help sustain demand for chips. We believe that strong trends in capital spending will continue and—if history is a guide—could coincide with outperformance of the Technology sector,” concludes Kastner.
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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.