As many investors jumped back on the strengthening U.S. markets in recent weeks, many funneled billions into technology sector-related exchange traded funds to ride the momentum in the growth segment, but it has left many vulnerable to swift pullbacks.
Investors have been pouring money into technology shares at a rate not seen since the height of the dot-com bubble, Bloomberg reports.
The PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech-heavy Nasdaq-100 Index, experienced $3.3 billion in net inflows over the past week and was the second most popular ETF trade, according to XTF data.
Many investors believed technology stocks could maintain their forward momentum as the Nasdaq-100 advanced almost 10% this year through Friday, or triple the S&P 500’s return.
“Nothing really positive has happened in tech, but it continues to receive inflows due to the fact that portfolio managers see tech as a secular growth story that simultaneously offers exposure to growth while also being somewhat insulated from other market forces,” Tom Essaye, founder of “The Sevens Report,” said.
As tech heavyweights retreat, it has exposed the risk of relying on the performance of a few large companies to maintain portfolio returns.
“The FAANG stocks are a considerable portion of the return this year, yet again,” Matt Schreiber, president and chief investment strategist at WBI Investments, told Bloomberg. “If they start to perform poorly, it’s possible the market could lose some of its positive directionality it has had because it has been the leadership in the return.”
FAANG stocks, or Facebook (NasdaqGS: FB), Apple (NadaqGS: AAPL), Amazon (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX) and Google (NasdaqGS: GOOG), make up about 37.2% of QQQ’s underlying portfolio.
Alternatively, investors who are wary of potential risk with traditional market capitalization-weighted funds may consider alternatively weighted strategies that don’t lean toward the largest or relatively pricier companies in the market. For instance, the Guggenheim S&P 500 Equal Weight Technology ETF (NYSEARCA: RYT) tracks the S&P 500 Equal Weight Information Technology Index, which equally weights tech components taken from the S&P 500 so holdings skew more toward mid-sized companies.
For more information on the ETF market, visit our ETF performance reports category.