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Jan. 9, 2018, 2:55 p.m. EST

Tech ETF hits record in 2018, surpassing peak from March 2000

Chip makers and ‘FAANG’ have driven the sector to record heights

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By Ryan Vlastelica

It nearly took 20 years, but the bursting of the dot-com bubble has at long last been fully repaired.

The largest technology sector exchange-traded fund has hit record levels in the early trading days of 2018, surpassing a record that has stood since March 2000, which represented the peak of the dot-com era, and was followed by a massive collapse in the value of tech stocks.

The old record of $65.44 was first breached on Jan. 4, and the fund has seen further gains since. The Technology Select Sector SPDR ETF /zigman2/quotes/207444675/composite XLK +1.52%  last traded at $66.56, up slightly on the day. It has gained 4% thus far this year, the third-best performing sector ETF behind energy and materials.

Tech was the biggest gainer of 2017 by far, with the fund up more than 32% over the course of last year. That was its ninth straight annual gain, and 2017 represented its best annual performance since 2009.

Much of last year’s outperformance was due to the massive gains in the so-called FAANG group of stocks, a quintet that includes tech titans Facebook , Apple /zigman2/quotes/202934861/composite AAPL +1.31% , and Google-parent Alphabet /zigman2/quotes/202490156/lastsale GOOGL -0.81% . (Amazon /zigman2/quotes/210331248/composite AMZN +1.36%  and Netflix /zigman2/quotes/202353025/composite NFLX -0.32% , two internet-related stocks that also comprise FAANG, are classified as consumer-discretionary companies.) According to Morgan Stanley, an equal-weighted group of FAANG stocks outperformed the tech sector by 50% to 38% over the course of 2017, and the group posted better returns than the overall sector in every quarter of the year.


Courtesy Morgan Stanley

Other tech bellwethers like Microsoft Corp. /zigman2/quotes/207732364/composite MSFT +1.16%  also outperformed the overall S&P 500 /zigman2/quotes/210599714/realtime SPX +0.71% , while recently semiconductor stocks have been heavy buying interest. The PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX +2.21%  has gained 44% over the past 12 months, more than double the return of the S&P.

Tech has been an investor favorite because it boasts high levels of growth at a time when expansion in the overall economy is a little more tepid. The components of the fund—which, due to its construction, also includes telecommunication stocks—have average annual revenue growth of 14.8%, according to FactSet, by far the highest level of growth of any S&P 500 sector fund. For the overall S&P, revenue growth is at 6.9%.

“The main argument in favor of tech is that it has higher growth. It is growing earnings significantly, and many tech companies will be big beneficiaries of the new tax law. That doesn’t just mean lower taxes, but that cash held overseas can be repatriated, which may mean that buybacks and dividends can be increased,” said David Katz, chief investment officer at Matrix Asset Advisors.

Katz cited Microsoft, Alphabet, and Qualcomm /zigman2/quotes/206679220/composite QCOM +2.47% as stocks that Matrix owned and was bullish on, but he cautioned that investors should be discerning with the sector given its run-up over the past year.

“We’re comfortable with a lot in tech, and we think it will continue to grow, but a lot of the growth is already priced into the shares and you don’t want to get caught up in the mania. Now is not the time to jump in with both feet; you want to be more discerning.”

Read: As internet stocks hit records, familiar questions about bubbles arise

This view was echoed by analysts at Columbia Threadneedle, which noted that since the financial crisis, the top-performing sector has changed every year.


Courtesy Columbia Threadneedle

“Like any attempt at market timing, trying to time sector investments will most likely leave you disappointed. Instead, focus on individual companies,” wrote Melda Mergen , the firm’s deputy global head of equities.

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Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.

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