The booming technology sector saw a setback last week, suffering its worst falls since June, after stellar performance so far this year.
Over the year to 22 November, technology stock ETFs rose nearly 20%, according to TrackInsight data, but flows have been choppy as investors have worried about a potential bubble in the sector.
However, the sector witnessed the first outflows in eight weeks last week, according to Bank of America Merrill Lynch, after historically high inflows of $6bn into tech equity funds over the previous six weeks, representing some 4.5% of total assets under management.
The outflows come as the sector’s strong run seems to have encountered a setback, with the S&P 500 technology sector falling some 2.6% on 29 November, largely due to sector rotation.
Investors were putting their money into financials stocks instead, fuelled by the news that Republicans were moving closer to passing their proposed tax reforms, while higher economic growth in the US has also made financials more appealing.
A potentially lower tax rate is not going to affect American financial in the same way it will benefit banks, since financials already pay a lower tax rate, according to S&P Global (just 18.5%, making it the third lowest rate for US large caps).
The falls in technology stocks hit the Nasdaq Composite index, and therefore the ETFs tracking it, the hardest. The benchmark was down 2.2% on Friday, while some of the key constituents declined even more significantly: Netflix was down 5.5%, Facebook 4%, Amazon fell 2.7%, Google parent Alphabet declined 2.4%, while Apple was 2.1% lower.
Meanwhile, the semiconductor sector was hit by a warning issued by Morgan Stanley. As a result, semiconductor ETFs suffered the most in the sector, with the PowerShares Dynamic Semiconductors fund and the First Trust Nasdaq Semiconductor ETF falling some 5.6% and 5.1%, respectively.
Other ETFs that were particularly negatively affected were the New Tech and Media ETF, down 4.2%, and the likes of First State NASDAQ-100-Technology Sector Index fund and the iShares North American Tech Software ETF, among others.
However, despite the recent falls, the sector remains on a strong footing, with strong fundamentals outweighing the fact that the sector will not benefit as much from tax reforms as other parts of the US stock market.
As a result, the setback could be an attractive entry point for investors looking to gain exposure to technology stocks, and the following weeks could see a return to inflows once again.
Over the year to 22 November, total inflows into technology stock ETFs reached nearly €11bn, according to TrackInsight, as overall investor sentiment towards the sector remains strong.