Buy the Dip in Tech ETFs

Tech stocks and ETFs took a beating on Apr 28 as investors prepared to weigh the real strength of the upcoming big tech earnings. As a result, the tech-heavy Nasdaq underperformed (down 1.4%) the S&P 500 (down 0.5%) and the Dow Jones (down 0.13%) yesterday. Technology Select Sector SPDR Fund XLK also declined 1.3% on Apr 28.

However, investors finally appeared convinced after Alphabet Inc. GOOGL kicked off the big tech releases on a strong note. Alphabet stock, which lost 3% on Apr 28, surged about 8% after hours on upbeat earnings results, causing after-market gains in several tech ETFs. Not only this, stock futures started trading in positive territory at the time of writing.

Investors were worried about a probable decline in advertising revenues for some tech giants. But the stay-home mandates boosted Alphabet’s ad revenues. YouTube ad revenues grew about 33% year over year, while total ad revenues increased more than 10%. Google Cloud jumped a solid 55% and now forms about 6.7% of its top line.

However, the company noted that the performance was strong during the first two months of the quarter, but a considerable slowdown in ad revenues was noticed in March.

Why Join the Tech Space

The results ruled out investors’ fear about Facebook FB’s possible slump in ad revenues for the upcoming quarter while Microsoft MSFT, in any case, holds promise for its surging cloud division. Both are reporting today after market. Microsoft lost 2.4% on Apr 28, but added 1.5% after hours while Facebook shed about 2.5% on Apr 28, but advanced 3.3% after hours (read: Microsoft ETFs to Watch on Surging Cloud Ahead of Q3 Earnings). Inc. AMZN should be another beneficiary of the mega cloud business as well as online shopping amid coronavirus-induced lockdowns. Amazon will report on Apr 30 after market. Apple Inc. AAPL will report on Apr 30 after market close.

Tech earnings are likely to decline 0.7% in Q1 of 2020 on 4.6% higher revenues. This is in contrast to a 15.3% slump in S&P 500 earnings on 1.2% increase in revenues. The technology sector is among the very few outperformers in the otherwise-downbeat earnings trends. Estimated long-term EPS growth rate for the tech sector is 12.6% versus 8.4% of the S&P 500.

Tech companies are cash-rich. As of fourth-quarter 2019, cash, cash equivalents and marketable securities was around $452.5 billion. Microsoft was the most cash-rich company globally, with about $134 billion in cash balance (read: "Cash is King:" Buy These Tech ETFs to Beat Coronavirus).

From the price/cash flow (P/FCF) angle, the tech sector is slightly cheaper than the S&P 500. Investors should also note that the P/FCF ratio of the computer and technology market now stands at 19.2x against the S&P 500 Composite Market ETF’s P/CF of 20.8x.

Tech sector’s debt profile is also impressive. Debt as a proportion of equity of the tech sector is 61.4% versus 82.7% of the S&P 500. Long-term debt as a percentage of capital is 38.4% versus 43.6% for the S&P 500 as a whole. 

Investors should also note that hoarding cash could be a great strategy for the near term. Fund managers are of the view that “looking for companies that have strong balance sheets, less debt, stable cash flows and carrying a respectable dividend yield are the preferred plays.”

Against this backdrop, we highlight a few Zacks Rank #1 (Strong Buy) tech ETFs that could be bought on the recent dip.

Technology Select Sector SPDR ETF XLK

iShares Expanded Tech-Software Sector ETF IGV

Vanguard Information Technology ETF VGT

Fidelity MSCI Information Technology Index ETF FTEC

iShares U.S. Technology ETF IYW

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Microsoft Corporation (MSFT): Free Stock Analysis Report, Inc. (AMZN): Free Stock Analysis Report

Apple Inc. (AAPL): Free Stock Analysis Report

Technology Select Sector SPDR ETF (XLK): ETF Research Reports

Facebook, Inc. (FB): Free Stock Analysis Report

Alphabet Inc. (GOOGL): Free Stock Analysis Report

Fidelity MSCI Information Technology Index ETF (FTEC): ETF Research Reports

Vanguard Information Technology ETF (VGT): ETF Research Reports

iShares Expanded Tech-Software Sector ETF (IGV): ETF Research Reports

iShares U.S. Technology ETF (IYW): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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