We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Worried About Tech Selloff? ETF Strategies to Play
Read MoreHide Full Article
On Jul 24, 2024, the tech-heavy Nasdaq 100 Index witnessed a considerable downturn, retreating more than 3%, marking its worst day since October 2022. The selloff led to a $1-trillion rout in the Nasdaq 100 Index and was triggered by artificial intelligence (AI) technology leaders, including semiconductor giants like Nvidia Corp. (NVDA - Free Report) (down 6.8%), Broadcom Inc. (AVGO) (down 7.6%), Super Micro Computer Inc. (SMCI) (dropped 9.15%) and Arm Holdings Plc (ARM) (down 8.2%).
The downturn was also caused by Alphabet Inc.'s (GOOGL - Free Report) earnings report, which highlighted increased capital expenses, leading to a more than 5% drop in its stock. Tesla Inc. (TSLA - Free Report) plunged more than 12% following a lack of details from CEO Elon Musk on the company's self-driving vehicle efforts.
Bloomberg index of the so-called Magnificent Seven technology stocks went down 5.9% on Jul 24, falling below its average price for the past 50 days for the first time since May. However, the stock has gained 33% since the start of the year.
Investor Sentiment
Investors expressed concerns over the return on investment from substantial AI infrastructure spending. Alec Young, chief investment strategist at Mapsignals, noted that despite massive investments, the payoff may take longer than expected, impacting short-term earnings for tech giants, as quoted on Bloomberg. Higher valuations of tech stocks also led to the latest crash.
ETF Strategies to Play
Against this backdrop, below we have highlighted a few ETF strategies that could win amid the tech selloff.
Rely on Sector Rotation, At Least for the Short Term
The tech crash came two weeks after a cooler-than-expected inflation print that resulted in a sector rotation lately. Due to a cooling in inflation and the labor market, the Fed is believed to cut rates as soon as in September. That caused investment rotation from tech winners into companies that would benefit most from the Fed rate cuts.
Sectors like utilities and real estate that benefit from low rates fared better on Jul 24. Real Estate Select Sector SPDR Fund (XLRE - Free Report) was off just 1.4% on Jul 24, while Utilities Select Sector SPDR Fund (XLU - Free Report) added 1.1% on that day.
Safe Sectors to Rescue Amid Market Selloff
When market volatility increases, investors often turn to safer sectors to preserve capital and provide stability. One such sector is consumer staples. Steady demand, defensive nature and decent dividend payments are the winning attributes of the sector. Consumer Staples Select Sector SPDR Fund (XLP - Free Report) was off 0.09% on Jul 24.
Play Small-Cap ETFs
Small-cap stocks appear to benefit from the recent selloffs and the likely Fed rate cut. The Russell 2000 outperformed larger indices, highlighting ongoing sector rotation dynamics. For a fourth straight session and the 10th time in 11 days, small caps’ performances topped that of their larger brethren on Wednesday, per a Bloomberg article. iShares Russell 2000 ETF (IWM - Free Report) was off 2.2% on Jul 24 versus Nasdaq 100’s loss of 3.6% (read: Can Small-Cap ETFs Turn Around Ahead?).
Bet on Dividends
Stocks with lower valuations often have higher dividend yields because their price is lower than the dividends they pay. This can provide a steady income stream, which is especially important in volatile markets. Higher dividends can also be reinvested. SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) , which charges 7 bps in fees and yields 4.32% annually, lost just 0.09% on Jul 24.
Should You Tap Tech Stocks With Covered Call Strategy?
A covered call strategy involves holding a long position in a stock and selling call options on the same stock to generate additional income. During the time of a selloff, while the primary stock position loses value as the stock price drops, the premium from the call options partially cushions the ill impacts.
Investors should note thatKurv Technology Titans Select ETF (KQQQ) is backed by experts at Kurv who believe that the technology exposure should be there in every portfolio but with a downside protection. With ETF KQQQ’s selection of growth-oriented tech titan stocks and the use of covered calls, investors will have tax-advantaged exposure to growth stocks without sacrificing income.
Quality ETFs Deserve a Look
Quality ETFs typically include companies with strong fundamentals, such as high return on equity, stable earnings growth and low debt levels. These characteristics often lead to more stable and predictable returns over time.
Companies with solid financial health are better positioned to weather economic downturns and market volatility, providing a smoother investment journey. WisdomTree U.S. Quality Dividend Growth Fund (DGRW - Free Report) is such an investment option in this category. DGRW ETF was off 1.5% on Jul 24.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Worried About Tech Selloff? ETF Strategies to Play
On Jul 24, 2024, the tech-heavy Nasdaq 100 Index witnessed a considerable downturn, retreating more than 3%, marking its worst day since October 2022. The selloff led to a $1-trillion rout in the Nasdaq 100 Index and was triggered by artificial intelligence (AI) technology leaders, including semiconductor giants like Nvidia Corp. (NVDA - Free Report) (down 6.8%), Broadcom Inc. (AVGO) (down 7.6%), Super Micro Computer Inc. (SMCI) (dropped 9.15%) and Arm Holdings Plc (ARM) (down 8.2%).
The downturn was also caused by Alphabet Inc.'s (GOOGL - Free Report) earnings report, which highlighted increased capital expenses, leading to a more than 5% drop in its stock. Tesla Inc. (TSLA - Free Report) plunged more than 12% following a lack of details from CEO Elon Musk on the company's self-driving vehicle efforts.
Bloomberg index of the so-called Magnificent Seven technology stocks went down 5.9% on Jul 24, falling below its average price for the past 50 days for the first time since May. However, the stock has gained 33% since the start of the year.
Investor Sentiment
Investors expressed concerns over the return on investment from substantial AI infrastructure spending. Alec Young, chief investment strategist at Mapsignals, noted that despite massive investments, the payoff may take longer than expected, impacting short-term earnings for tech giants, as quoted on Bloomberg. Higher valuations of tech stocks also led to the latest crash.
ETF Strategies to Play
Against this backdrop, below we have highlighted a few ETF strategies that could win amid the tech selloff.
Rely on Sector Rotation, At Least for the Short Term
The tech crash came two weeks after a cooler-than-expected inflation print that resulted in a sector rotation lately. Due to a cooling in inflation and the labor market, the Fed is believed to cut rates as soon as in September. That caused investment rotation from tech winners into companies that would benefit most from the Fed rate cuts.
Sectors like utilities and real estate that benefit from low rates fared better on Jul 24. Real Estate Select Sector SPDR Fund (XLRE - Free Report) was off just 1.4% on Jul 24, while Utilities Select Sector SPDR Fund (XLU - Free Report) added 1.1% on that day.
Safe Sectors to Rescue Amid Market Selloff
When market volatility increases, investors often turn to safer sectors to preserve capital and provide stability. One such sector is consumer staples. Steady demand, defensive nature and decent dividend payments are the winning attributes of the sector. Consumer Staples Select Sector SPDR Fund (XLP - Free Report) was off 0.09% on Jul 24.
Play Small-Cap ETFs
Small-cap stocks appear to benefit from the recent selloffs and the likely Fed rate cut. The Russell 2000 outperformed larger indices, highlighting ongoing sector rotation dynamics. For a fourth straight session and the 10th time in 11 days, small caps’ performances topped that of their larger brethren on Wednesday, per a Bloomberg article. iShares Russell 2000 ETF (IWM - Free Report) was off 2.2% on Jul 24 versus Nasdaq 100’s loss of 3.6% (read: Can Small-Cap ETFs Turn Around Ahead?).
Bet on Dividends
Stocks with lower valuations often have higher dividend yields because their price is lower than the dividends they pay. This can provide a steady income stream, which is especially important in volatile markets. Higher dividends can also be reinvested. SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) , which charges 7 bps in fees and yields 4.32% annually, lost just 0.09% on Jul 24.
Should You Tap Tech Stocks With Covered Call Strategy?
A covered call strategy involves holding a long position in a stock and selling call options on the same stock to generate additional income. During the time of a selloff, while the primary stock position loses value as the stock price drops, the premium from the call options partially cushions the ill impacts.
Investors should note thatKurv Technology Titans Select ETF (KQQQ) is backed by experts at Kurv who believe that the technology exposure should be there in every portfolio but with a downside protection. With ETF KQQQ’s selection of growth-oriented tech titan stocks and the use of covered calls, investors will have tax-advantaged exposure to growth stocks without sacrificing income.
Quality ETFs Deserve a Look
Quality ETFs typically include companies with strong fundamentals, such as high return on equity, stable earnings growth and low debt levels. These characteristics often lead to more stable and predictable returns over time.
Companies with solid financial health are better positioned to weather economic downturns and market volatility, providing a smoother investment journey. WisdomTree U.S. Quality Dividend Growth Fund (DGRW - Free Report) is such an investment option in this category. DGRW ETF was off 1.5% on Jul 24.