(The opinions expressed here are those of the author, a
columnist for Reuters.)
By John Wasik
CHICAGO, April 14 A resounding shot across the
bow has been fired at the tech sector in recent weeks. The
tech-heavy Nasdaq Composite Index is down nearly 5 percent in
April through Friday's close and the Nasdaq Biotechnology Index
is off 21 percent from its record closing high on Feb. 25. Many
of the sector's flagships and newcomers have been in the
The latest tech stock falterings could be a sign of trouble
To get a clearer idea of what's roiling the tech sector, you
have to look at trends within various parts of it.
One item to look at is data storage, which is offered by
Amazon.com Inc and Google Inc and has been
the object of a price war of late. While falling prices in this
sub-sector are great for customers, they will eat into profits
for competing companies.
Brian Bolan, a portfolio manager and equity strategist for
Zacks Investments in Chicago, surmises that the storage price
war is partially responsible for the delay of initial public
offerings of companies like Dropbox and Boxee.
Tech companies' valuations, particularly those that are
barely profitable, may be the object of inflated expectations of
future business and earnings because they often engender
irrational exuberance. Witness the dot-com bubble of more than a
Today's valuations may not wreck as much havoc if they end
up having a correction, according to a recent Citi Private Bank
bulletin, which notes that current tech "speculative growth
expectations are a far less profound influence on the overall
U.S. stock market than was the case in 1999-2000."
That doesn't mean that the next few months won't be rocky
for tech shares and the market in general. The year started with
a broad-based selloff, and the current bull market may be long
in the tooth in its fifth year.
"Valuations become more reasonable before investors do,"
Bolan adds, "But volatility is definitely something you're going
Although diversification is usually a good idea in any
sector, it won't guarantee you protection from tech's
One way to cut the risk of the sector is to invest in a
broad-based index fund. Although you won't avoid a widespread
selloff, there may be safety in numbers as most index funds give
more weight to the older, more established dividend-paying
companies with consistent earnings.
The Vanguard Information Technology ETF, for
example, owns cash-rich Apple Inc, Google and Microsoft
Corp in addition to older stalwarts like International
Business Machines Corp and Intel Corp. The
fund is up nearly 22 percent for the year through April 11. It
charges 0.14 percent in annual management expenses.
Another option is the iShares Technology ETF, which
is up 3 percent year to date and has gained about 22 percent for
the prior 12 months through April 11, but charges more than the
Vanguard fund at 0.46 percent in annual expenses. The fund's
weighting in the top tech stocks is slightly different than
Vanguard's, with more than one-third of its holdings in Apple,
Google and Microsoft.
If you want to stay in tech stocks, to ratchet down exposure
to the biggest names in this rambunctious sector, you should
consider an equal-weighted fund that doesn't concentrate its
holdings in the most popular stocks, such as the Guggenheim S&P
500 Equal-Weighted Technology ETF, which is up 26
percent for the 12 months through April 11. The fund holds less
than 2 percent (each) in stocks like First Solar Inc,
Seagate Technology and Teradata Corp.
While pundits have mixed opinions on whether the latest tech
troubles will spill over into the broader stock market, it's
likely that there's more volatility ahead and it will become
even more difficult to tell when it's a good time to buy.
While tech stocks benefited from the broad-based gains of
the larger U.S. stock market last year, they won't be immune
from a wider selloff. They still make sense long-term in an
information/technology intensive economy, although short-term
they will always be volatile. You might see some bargain pricing
if the sector goes into a full-blown correction. Those
attempting to time the sector or leery of this ever-skittish
sector might want to seek some safer harbors.
(Follow us @ReutersMoney or here;
Editing by Beth Pinsker and Jonathan Oatis)