Growth stocks have been among the best performers this year and also the worst performers in the recent selling. As investors sift through opportunities, one may reconsider these growth sectors and related ETFs, especially with earnings season in full swing.
“The equity market is at a critical point here,” Kurt Brunner, portfolio manager, Swarthmore Group, told Reuters. “In order for it not to get a lot worse, I think you need to see Amazon and Alphabet put up some good numbers.”
Microsoft Corp (etftrends.com/quote/MSFT) will reveal its quarterly report card on Wednesday after the bell, followed by Alphabet (etftrends.com/quote/GOOGL) and Amazon (etftrends.com/quote/AMZN) late on Thursday.
Bringing a little life back into the growth trade, Netflix (etftrends.com/quote/NFLX) enjoyed a 5% bump on Wednesday after its upbeat quarterly report diminished fears that the online streaming company was losing momentum.
While names like Facebook, Amazon, Alphabet, Apple, Microsoft and Netflix have enjoyed a strong momentum rally in recent years, these stocks were also at risk of a major sell-off should investor views about the broad growth them sour.
“So many funds are invested in the same stocks. They got less crowded in the past week, but at this point it’s difficult to say if we are going to shrug everything off and go to new highs a month from now, or if we’re going to test more lows,” Dennis Dick, a proprietary trader at Bright Trading LLC, told Reuters.
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Nevertheless, the sell-off has made this area of the market more palatable as a cheaper entry point for investors. For example, the dip in Amazon and Facebook has left the company stocks trading at discounted multiples of their expected earnings. Amazon’s forward price-to-earnings ratio last week was 74, a seven-year low. Facebook traded at 18 times expected earnings, the lowest since its 2012 public listing.
ETF investors could also gain exposure to these areas through sector ETF plays. For instance, the newly minted Communication Services Select Sector SPDR Fund (NYSEArca: XLC) includes many software and internet names, like Facebook 17.3%, Alphabet Class C 11.2%, Alphabet Class A 11.0% and Netflix 4.4%. Additionally, Amazon is the largest component holding of Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) at 22.4% of the ETF’s underlying portfolio.
For more information on market sectors, visit our sector ETFs category.