FBThe technology sector remains the best-performing group in the S&P 500 this year, but the group has recently pulled back, albeit in modest fashion.
For example, the Technology Select Sector SPDR (NYSEArca: XLK). XLK, the largest technology exchange traded fund by assets, is down more than 1% over the past week.
The PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech heavy Nasdaq-100 Index, is lower by 1.5% over that period. However, there are multiple reasons for investors to not panic, including historical data suggesting tech stocks are entering a period of seasonal strength.
XLK tries to reflect the performance of the Technology Select Sector Index, which is comprised of technology and telecom sector of the S&P 500. The ETF 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. Top holdings include Apple (NasdaqGS: AAPL), Microsoft (NasdaqGS: MSFT) and Facebook (NasdaqGS: FB).
“Despite the recent tech headwinds, the sector has been outstanding in 2017. QQQ is now testing its footing atop its 80-day moving average — a trendline that coincides with a round 20% year-to-date gain, and contained the fund’s late June/early July swoon. Meanwhile, the XLK is also up roughly 20% year-to-date, and could find support atop its ascending 10- and 20-week moving averages,” according to Schaeffer’s Investment Research.
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While earnings multiples on tech stocks have jumped this year, investors should not expect another tech bubble on par with what was seen in 2000. In fact, the largest tech stocks today are far less pricey than their counterparts were in 2000.
“It’s also worth noting that October is historically the best month to own both the PowerShares QQQ Trust and the XLK,” notes Schaeffer’s. “Since inception, QQQ has averaged an October gain of 4%, according to data from Schaeffer’s Quantitative Analyst Chris Prybal — more than double its second-best average monthly gain of 1.7%, which occurs in November. The XLK also tends to shine in October, gaining an average of 3.4% since inception, and rallying another 1.8% in November.”
Investors have added $1.6 billion to QQQ this year, making it the top asset-gathering PowerShares ETF.
For more information on the tech sector, visit our technology category.
Tom Lydon’s clients own shares of QQQ, Apple and Facebook.