Second Quarter Brings Departures From Tech ETFs

Technology was the best-performing sector in the S&P 500 last year and is again outperforming the broader market to start 2018. The Technology Select Sector SPDR ETF (XLK) and the Invesco QQQ ETF (QQQ), which tracks the tech-heavy Nasdaq 100 Index, are up 1.3% and 1.4% year to date, while the S&P 500 is lower by 1.8%. Those performances are not enough to keep some investors from departing some big-name technology exchange-traded funds (ETFs) to start the second quarter.

"With global equity markets selling off under threats of a trade war – combined with newly exposed risks in the tech sector – it's no surprise that investors have started to reduce exposure to U.S. equity-focused ETFs," said Markit in a recent note. "In Q1 2018, we saw the first quarterly outflows from this asset class since 2016, though the net outflow of $151 million is not significant compared with the $88 billion in Q4 inflows. So far in Q2, the outflow trend has continued, but with the quarter being one week old that could easily reverse if the market is able to find its footing." (See also: JPM Warns Customers Against Tech Stocks.)

The departure of investors from tech ETFs to start the second quarter comes as those funds have been slumping. While XLK and QQQ are still sporting year-to-date gains, those ETFs are down 3.4% and 3.9%, respectively, since the start of March. Facebook, Inc. (FB) is one of the culprits weighing on the likes of XLK and QQQ. Additionally, pullbacks in Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX), among others, are pressuring QQQ. Amazon and Netflix are classified as consumer discretionary stocks, and that is QQQ's second largest sector weight behind technology. Amazon and Netflix are down an average of 9% over the past month.

While there is plenty of time left in the second quarter, if the trend of outflows from technology funds persists, this could be the first quarter since the second quarter of 2016 that investors have pulled money from U.S. tech ETFs. In other words, U.S.-listed tech ETFs have added money for seven consecutive quarters.

"One sector ETF investors did not shy away from in Q1 was technology sector focused funds, which saw a second consecutive quarter of greater than $2.5 billion of inflows. The opening days of Q2 have seen $350 million in outflows, suggesting investors may be starting to rotate away from the sector," according to Markit. Since the start of the second quarter, investors have pulled about $233 million combined from QQQ and XLK. (For more, see: Increased Tech Regulation Worries Overblown: Wells Fargo.)

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