Market experts are expecting a modest year of gains in 2020 after 2019 rewarded those investors who didn’t sit on the sidelines and stayed invested in the markets even after a rough fourth-quarter ending to 2018. Technology and growth equities, in particular, took center stage for gains in 2019, which translated into strength for select ETFs.
The Technology Select Sector SPDR Fund (NYSEArca: XLK) and other technology ETFs are being boosted again this year by the likes of Apple Inc. (AAPL) and Microsoft Corporation (MSFT).
XLK seeks investment results that correspond generally to the price and yield performance of publicly traded equity securities of companies in the Technology Select Sector Index.
While those stocks continue to impress, the price of admission to technology, the S&P 500’s largest sector weight, is rising, too.
“As of Jan. 30, technology was about 11% overvalued, as measured by the price/fair value estimate ratio for the median tech stock,” said Morningstar in a recent note. “This was one of the highest ratios we’ve seen since 2007. Maybe we’ll get a pullback due to coronavirus.”
XLK “seeks to provide precise exposure to companies from technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment, instruments, and components,” according to State Street.
“In software, we saw a bit of a pullback in August through October 2019, particularly for names with aggressive valuations,” according to Morningstar. “But software’s been on a tear the past couple of months as well. Looking across our coverage, Apple, which is always an important tech bellwether, is near all-time highs with strong iPhone and wearable sales. Yet, we think the stock is a little bit overvalued today.”
Apple and Microsoft combine for about 40% of XLK’s weight.
“In software, we raised our fair value estimates for Microsoft and ServiceNow after they delivered strong quarters. So, we see a modest margin of safety in those names today. Intel‘s another one to watch if there’s a pullback,” said Morningstar.
Related: A Big Week Ahead for Technology ETFs
Many investors embrace technology stocks and ETFs for the sector’s growth prospects and those catalysts, including 5G, are abundant. Some market observers believe the rally in chip stocks can continue, particularly if investors remain enthusiastic about 5G.
Intel Corporation (INTC) is XLK’s fourth-largest holding at a weight of 4.35%.
For more information on the market sectors, visit our sector ETFs category.
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.