The stock market has been quite strong over the past few weeks, as it’s managed to break out of its multi-month consolidation. One interesting change in character has been the outperformance in tech stocks since mid-May.
Since May 13, the tech-heavy Nasdaq is up by 11.5%, while the S&P 500 is up 5.3% over the same period. Of course, this follows many months of underperformance in tech stocks. Some of the catalysts for this change in behavior are that the last two earnings seasons have been quite strong for tech. Additionally, longer-term rates have also backed off which was one of the major catalysts for the rotation from growth to value.
There’s a vigorous debate about whether tech stocks are going to continue outperforming or whether value and cyclical stocks will lead the market higher as they did from November to May. Tech bulls will point to softening economic data, deceleration in leading indicators of inflation, and favorable valuations for the sector. If tech continues to outperform, then investors should consider buying the following ETFs: Renaissance IPO ETF (IPO), Global X Social Media ETF (SOCL), VanEck Vectors Semiconductor ETF (SMH), and ARK Innovation ETF (ARKK).
Renaissance IPO ETF (IPO)
IPO is an ETF that holds some of the highest-profile IPOs of the past couple of years such as Snowflake (SNOW), Palantir (PLTR), and Peloton (PTON). While Nasdaq made new highs this week, IPO remained 15% off its highs from mid-February.
If tech stocks keep going higher, then it’s likely that underperforming parts of the tech sector will catch up. This is especially true as IPOs tend to be higher beta and outperform when risk appetites are strong. Thus, the sector was particularly hit hard during the sell-off of growth stocks during which speculative and higher-beta stocks saw the biggest losses.
However, IPO was one of the best-performing ETFs during the first part of the bull market as it gained 279% from the bottom in March 2020 to its high in February of this year. The POWR Ratings are also bullish on IPO as it is rated a B which translates to a Buy rating.
The POWR Ratings also evaluates stocks based on various components. Here, IPO also shines as it has an A for Trade Grade. This is consistent with its recent momentum and potential for a rapid move higher if tech continues to move higher.
Global X Social Media ETF (SOCL)
Similar to IPO, SOCL was a major outperformer from March 2020 to February 2021. Most importantly, these businesses saw an acceleration in user growth and time spent on platforms during the coronavirus. Further, these companies also have high margins which can lead to optimistic assumptions about future earnings growth especially when revenues are accelerating.
It’s likely that if tech stocks are going to continue outperforming, then investors will once again start prioritizing these characteristics. The POWR Ratings is also bullish on SOCL as it’s rated an A which translates to a Strong Buy. The ETF’s category – Technology Equities ETFs – also is rated an A which reflects the bright outlook for tech stocks.
VanEck Vectors Semiconductor ETF (SMH)
Many people consider semiconductors to be a leading indicator for the technology sector, similar to how transportation stocks are considered a leading indicator for industrial stocks. What’s unique about the previous recession is that spending on semiconductors actually increased due to the unique nature of the pandemic and shutdowns which caused people to spend on upgrading their tech devices.
This also has contributed to the recent supply crunch in semiconductors which is having an impact on all types of industries including autos, durable goods, and electronics. It’s also a reflection of today’s world in that all sorts of new products are software-driven, have chips inside them, and are connected to the network.
So, it makes sense that if tech stocks are going to keep trending higher, then SMH will also keep moving higher. The POWR Ratings are quite bullish on SMH as it is rated an A which translates to a Strong Buy. SMH also has an A for Trade grade and Buy & Hold grade which reflects that it’s been outperforming on multiple timeframes.
ARK Innovation ETF (ARKK)
ARKK is a constant presence in the headlines due to the ubiquity of CEO and founder Cathie Wood. She’s certainly divisive in terms of her aggressive approach to investing and belief in technology, growth stories.
However, there’s no disputing that she’s had fantastic outperformance and has caught spectacular moves in many growth stocks. Yet, her risky approach to investing certainly contributed to ARKK’s steep drop from mid-February to mid-May, when it declined by 39%. Since then, ARKK has recovered about half its drop.
If tech stocks continue to outperform, then it’s likely that ARKK will start to make up ground as well. ARKK’s holdings include stocks like Coinbase (COIN), Palantir (PLTR), and Invitae Corp. (NVTA) which are high-risk, high-reward, and they will likely see more inflows if the Nasdaq keeps trending higher.
Currently, ARKK is rated a B by the POWR Ratings which translates to a Buy rating. In terms of component grades, ARKK has an A for Trade grade which reflects its short-term momentum as the ETF is up by more than 34% in a little over a month. Given the nature of ARKK’s holdings, it’s likely the riskiest out of all of these four ETFs.
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IPO shares were trading at $64.92 per share on Friday afternoon, down $0.15 (-0.23%). Year-to-date, IPO has gained 0.67%, versus a 16.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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