Tech ETFs Roar Back to Life in 2023

After the carnage experienced by the Tech sector last year which saw the likes of Amazon, Meta and Microsoft lose up to 70% of their value, investors are breathing a sigh of relief at the strong start to 2023. The tech-heavy Nasdaq is up almost 13% YTD, aided by a positive report from Meta, and a lower-than-expected interest hike from the FED. Investors have certainly been enjoying the rally so far, with fears of sticky inflation, geopolitical tensions, and an aggressive hiking cycle seemingly evaporated. 

This month’s FED meeting saw a 25% bps hike where the market expected 50bps, followed by commentary that suggested more hikes will be needed. The surprisingly small hike caused tech stocks to rally much to the joy of investors, but it also made others quite nervous. Is this rally sustainable?

Well it depends on who you listen to, and whose crystal ball you fancy, but cryptic Tweets such as this one from Michael Burry, are certainly entertaining if nothing else:

The tweet has been deleted since.

Can the rally be trusted?

Rather than trying to project what will happen over the next few months (which is anybody’s guess), we could look at the average annual gains in the NASDAQ index to try and figure out how things measure up to the historical returns.

Here are a couple of facts covering the last 52 years’ worth of NASDAQ Data:

• Average return = 12.4%
• The Nasdaq ended the year positive 78% of the time
• The Nasdaq ended the year up >20%, 36% of the time

Given the historical statistics, and the fact that we rallied close to 18% YTD already, investors need to ask themselves whether they believe that 2023 will be part of the 36% that saw gains of +20% for the year, considering we are still in a high inflationary, high-interest environment for the foreseeable future. I say it's unlikely that it’s smooth sailing from here, but I have been humbled before.

3 of the best* tech ETFs to own - and sleep well at night

Invesco Technology S&P US Select Sector UCITS ETF Acc (XLKS)

XLKS provides investors with exposure to the S&P Select Sector Capped 20% Technology Index, which ensures that no holding makes up more than 20% of the index. The ETF exposes European Investors to some of the largest Tech companies that make up the S&P 500 index, and so will differ in performance when compared to the NASDAQ index.

A diversified, tech-oriented ETF, XLKS also provides exposure to sectors such as Financials, Health Care, and Consumer Staples, allowing it to earn dividends which are reinvested at the Fund level. It is probably more suited for investors who want some tech exposure, but are not ready to bet the house on a continued rally. The ETF has close to 40% of its holdings in Microsoft and Apple however, so it is very sensitive to the prices of these two holdings.

• YTD Performance: 11.29%
• Fee: 0.14%
• Dividend Policy: Accumulating

Amundi Nasdaq-100 UCITS ETF- Daily Hedged Eur (NDXH)

NDXH provides European investors with exposure to the Non-Financial component of the Nasdaq 100 Index in Euros, on a hedged basis. The ETF is offered in three options (Hedged Euro, Non-Hedged Euro, and USD) and allows investors to benefit from a further rally in Technology stocks by removing Financial companies from the allocation, thus making it a pure play on the tech sector. 

The Euro hedging is also an added bonus when compared to the non-hedged version ANX, as it allows investors to participate in the tech stock rally without taking on currency risk, though it does come at a higher fee (0.23% Unhedged vs 0.35% Hedged). It is also possible to purchase the fund directly in USD.

• YTD Performance: 16.13% Euro Hedged
• Fee: 0.35%
• Dividend Policy: Accumulating

Invesco Nasdaq-100 ESG UCITS ETF

The Invesco Nasdaq-100 ESG UCITS ETF differs from the two options listed above, in that it weighs its holdings based on their ESG ranking rather than market cap in the Nasdaq Index. As a result, the YTD returns are slightly lower for 2023, but the losses in 2022 are also smaller. It turns out that being ethical can lower volatility!

Similar to the other two examples, the ETF’s two top holdings are Microsoft and Apple, with a roughly 13% weighting to each company. At the same time, companies such as Tesla and Amazon have a lower weight compared to the other two examples, and Meta does not even appear in its top holdings. 
This would explain its relative outperformance in 2022, as Tesla and Meta suffered heavy losses throughout the year. If these two companies were to rally in 2023, this ETF would likely underperform, all other things equal.

• YTD Performance:  12.90%
• Fee: 0.25%
• Dividend Policy: Accumulating

*IMPORTANT: The views and opinions expressed herein are the views and opinions of the author and do notnecessarily reflect those of Trackinsight. Past performance is not indicative of
future results. Investors should undertake their own due diligence and carefully evaluate
companies before investing. ADVICE FROM A FINANCIAL PROFESSIONAL IS STRONGLY ADVISED.