Can Tech ETFs Keep Up Their Winning Momentum?

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Investors maintained their bullish stance on stocks for the seventh consecutive week, pouring $4.6 billion into U.S. equity funds. U.S. technology stocks recorded their largest weekly inflows last week in nine weeks, with the sector seeing a revival after its mega-cap-led rally lost steam by the end of May, per strategists at BofA Global Research, as quoted on MarketWatch.

Tech stocks hauled in nearly $1 billion in the week ending Wednesday, the highest in more than two months, after experiencing the same amount of outflows the previous week, a team of strategists led by Michael Hartnett, chief investment strategist at BofA Global Research, said in a client note on Friday.

NVIDIA and Apple Cross Trillion-Dollar Milestone

NVIDIA Corp. NVDA witnessed a remarkable milestone as its market capitalization surpassed $3 trillion for the first time, propelling its stock by more than 6%. Concurrently, Apple Inc. also saw its market cap exceed $3 trillion, achieving its first close at or above that threshold since January. Apple AAPL gained 2% last week.

A Decline in Treasury Yields Drive Markets

A decline in Treasury yields earlier in the week bolstered the market rally. Both the 10-year and 30-year rates reached their lowest levels since late Mar 28. No wonder, along with technology, utility stocks (that perform well in a low-rate environment) experienced a surge in demand, attracting about $1 billion, their highest weekly inflow since January 2022, according to BofA strategists.

Rising Rates in the Cards Again?

Notably, the positive momentum met with a setback on Friday, caused by unexpected strength in the U.S. labor market. This development prompted investors to question whether the Fed would initiate interest rate cuts this year sooner than expected.

The yield on the 10-year Treasury surged by 14.8 basis points to 4.428%, while the 30-year rate jumped by 11.8 basis points to 4.547% on Friday. If rates remain higher for longer, there is the potential for a “hard landing” of the U.S. economy instead of a “no landing” scenario being expected now.

Will the Tech Dominance Continue?

In the last 20 years, the technology ETF Technology Select Sector SPDR (XLK) recorded a 13.99% compound annual return, with an 18.05% standard deviation. In the last 20 years, the U.S. inflation adjusted return of XLK is 11.12%. The ETF XLK performed pretty consistently in the past seven years, seeing gains in five years.

In 2018, the fund dipped 1.7%. However, the fund plunged 27.7% in 2022 on overvaluation concerns and rising rates. But investors should note that XLK amassed about $1 billion in its tough year 2022. Hence, this year, too, the fund should not lack on hauling in solid assets. After all, the operating environment of the fund is pretty solid.

With the AI boom taking the world in its grip, the tech sector has every reason to grow ahead. Chip companies are coming up with announcements related to the launch of new-generation chips every other day (read: Chip ETFs in Focus on New Generation AI Product Launches).

Notably, the AI market is likely to reach $184.0 billion in 2024. The market size is expected to show an annual growth of 28.46%, resulting in a market volume of $826.7 billion by 2030, per Statista.

Bottom Line

Despite concerns over rising rates, tech ETFs have demonstrated a strong historical performance. With the ongoing AI boom and advancements in chip technology, the tech sector is poised for substantial growth both in terms of performance and asset generation.

Along with XLK, investors can keep track of iShares Expanded Tech Sector ETF IGM (up 20% this year), Invesco Nasdaq Internet ETF PNQI (up 13% this year) and Invesco AI and Next Gen Software ETF IGPT (up 23% this year).

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Apple Inc. (AAPL) : Free Stock Analysis Report

NVIDIA Corporation (NVDA) : Free Stock Analysis Report

Invesco NASDAQ Internet ETF (PNQI): ETF Research Reports

iShares Expanded Tech Sector ETF (IGM): ETF Research Reports

Invesco AI and Next Gen Software ETF (IGPT): ETF Research Reports

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