Credit: Shutterstock photoBy Michael Foster
On January 1, 2018, I made my boldest prediction of the year : bitcoin was going to crash. HereaEURtms what happened since:
Crytocurrencies Are Dying
There are lots of reasons why bitcoin has cost investors a lot of money: itaEURtms inefficient; itaEURtms not private; and glitches and hacking cause people to lose bitcoins. But the main reason is this: the dumb money followed the smart moneyaEUR"and ended up holding the bag.
IaEURtmve seen this story play out many times, which is why I urge you to be contrarian and avoid the traps market manipulators set up, whether it was dot-com stocks in the late aEURtm90s, housing in the mid-2000s or fantasy Internet money in the 2010s.
The other side of this coin is why IaEURtmm urging you to do one simple thing in 2019: jump into tech stocks. And if you want dividends, donaEURtmt worry. IaEURtmve got 2 funds offering 6.3% and 9.3% payouts for you to choose from.
IaEURtmll show you both (and reveal the one I see as the best buy now) a little further on.
My No. 1 Prediction for 2019
If there is anything you can rely on, itaEURtms the ability of tech companies to print money, because the entire world is embracing technology to communicate, interact, trade, learn and buy new products.
The proof is in the numbers: while tech has one of the highest net profit margins of any S&P 500 sector, at 22.1%, its profits are actually growing: 100% of IT companies have reported earnings above estimates in the third quarter of 2018.
ThataEURtms right: not a single one missed!
If you looked at FAANG stocks over the last month, however, youaEURtmd get a very different impression. On average, these companies are down massively, due in no small part to the 14.5% drop from Apple ( AAPL )aEUR" with only Facebook ( FB ) slightly above water (but itaEURtms still down sharply for the year):
An Awful Month for Tech
Zoom out a bit, however, and the picture is much rosier. FAANG stocks are still up double digits, on average, in a year when the S&P 500 is down:
FAANG Still Outperforming
I wouldnaEURtmt be surprised if this news comes as a surprise to you. The financial press has been beating up on tech companies for a bunch of reasonsaEUR"privacy scandals at Facebook and weakening subscription growth at the trade war for AppleaEUR"but the reality is that tech is still performing well.
I wouldnaEURtmt be surprised if this news comes as a surprise to you. The financial press has been beating up on tech companies for a bunch of reasonsaEUR"privacy scandals at Facebook and Alphabet ( GOOGL ), weakening subscription growth at Netflix ( NFLX ), the trade war for AppleaEUR"but the reality is that tech is still performing well.
But the market isnaEURtmt rewarding these stocks.
If we look at net fund flows for the Invesco QQQ Trust ( QQQ ), we see that $1.44 billion has left this tech-focused ETF in just the last three months. Since this is a popular ETF for tracking the Nasdaq 100, a tech-heavy index, those net outflows show the dumb money is panicking and selling offaEUR"the opposite of the setup that caused bitcoin to crash.
If we look at the Technology Select Sector SPDR ETF (XLK) , things look even better for a contrarian. While hedge funds and institutional investors sometimes buy QQQ, these groups donaEURtmt use XLK quite as much. And this fund has seen billions of net outflows for 2018: a total of $2.44 billion has exited XLK in the last three months.
The conclusion is clear: the dumb money is exiting tech, which means thereaEURtms an opportunity to buy in before the pendulum swings back the other way and we see inflows.
The Tech Play
Long-time readers know one of my favorite ways to play tech is through closed-end funds CEFs) , because these funds hand you generous dividends while you wait for upsideaEUR"and some tech CEFs have shown serious upside over the years.
But letaEURtms look a bit closer at four options: the two ETFs I just mentioned (XLK and QQQ) and two CEF contenders.
First, letaEURtms look at XLKaEURtms top 10 holdings:
There are a lot of large cap companies in this ETFaEURtms portfolioaEUR"household names that have been beaten up recently, but nowhere near as much as some tech stocks with smaller market caps.
Source: ALPS Portfolio Solutions Distributor
Similarly, the other ETF, QQQ, sports holdings that are concentrated on many tech heavyweights, with some important differences:
and arenaEURtmt tech companies by any stretch of the imagination (and CMCSA is arguably one of the firms being disrupted by tech upstarts), meaning this portfolio doesnaEURtmt give as much tech exposure as XLK. If we want to just invest in tech, then, we should choose XLK over QQQaEUR"but only if weaEURtmre going to limit ourselves to ETFs.
Source: Invesco
PepsiCo (PEP) and Comcast Corp (CMCSA) arenaEURtmt tech companies by any stretch of the imagination (and CMCSA is arguably one of the firms being disrupted by tech upstarts), meaning this portfolio doesnaEURtmt give as much tech exposure as XLK. If we want to just invest in tech, then, we should choose XLK over QQQaEUR"but only if weaEURtmre going to limit ourselves to ETFs.
But I wouldnaEURtmt do that, because there are two better alternatives: the CEFs I mentioned earlier.
2 Tech CEFs Paying Up to 9.3% Dividends
IaEURtmm talking about the Columbia Seligman Premium Tech Growth Fund (STK) , which pays a 9.3% dividend, and the BlackRock Science and Technology Trust (BST) , with a regular dividend of 6.3%. IaEURtmve written of my appreciation for BST many times in the past; itaEURtms up double-digits year to date, while STK is down 9%:
BST Wins Out in 2018
That doesnaEURtmt mean BST is the best choice now, though. To decide which is the better pick, we need to dig deep into each fundaEURtms holdings.
LetaEURtms start with BST, which recently made an aggressive bet on payments companies. ThataEURtms part of the reason why itaEURtms been strong lately, as bitcoin failed to replace the payments solutions of BSTaEURtms major holdings, such as Square (SQ) and Visa (V). But this fund also has a lot of exposure to China:
BST Looks to China aEUR
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
