The Technology Select Sector SPDR (NYSEArca: XLK), the largest technology exchange traded fund by assets, and the PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech heavy Nasdaq-100 Index, are usually viewed as growth plays.
That also implies that the technology sector, the largest sector weight in the S&P 500, can trade at valuations that are expensive relative to the broader market.
“Tech is considered a ‘growth’ sector, which means its earnings should grow at a faster clip, as compared to the ‘value’ stocks that thought of as cheap based on different valuation metrics,” reports Evie Liu for Barron’s. “At the crosswalk of market volatility today, investors continue to debate whether its time to switch into value, which had been underperforming, or stick with growth.”
Diversified Tech Exposure
XLK includes companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments and components; and wireless telecommunication services.
Importantly, the growth factor has been trouncing its value counterpart for a while now, indicating investors are being rewarded for taking on supposedly higher valuations.
“But others still have faith in growth. To start with, growth stocks have outperformed value stocks dramatically over the past decade. The Russell 1000 Growth Index has more than doubled the growth of the Russell 1000 Value Index since the last recession,” according to Barron’s.
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With technology’s ascent and that of QQQ, come concerns that the Nasdaq-100 is too heavily exposed to a small number of stocks. Additionally, some analysts opine that the benchmark’s significant technology overweight leaves it vulnerable should tech stocks fall out of favor.
“The P/E ratio of Russell 1000 Growth relative to Russell 1000 Value is currently at 37%, a reasonable place if looking back at history and their respective growth rates, according to Brad Neuman from Alger,” reports Barron’s.
For more information on the tech sector, visit our technology category.
Tom Lydon’s clients own shares of QQQ.