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Fund Watch

Use This ETF to Tiptoe Into Tech Shares

iShares Edge MSCI USA Momentum Factor, a new member of the Kiplinger ETF 20, stayed ahead of its benchmarks.

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The Kiplinger ETF 20, our favorite exchange-traded fund picks, have done their job and kept pace with their respective benchmarks so far this year. Given recent global market declines, though, that means most have lost ground since the start of 2018. For example, after leading the stock market higher for most of 2017, tech stocks fell hard and fast this year. Over a four-week period in March and April, tech shares declined 7.2%, compared with a 4.2% drop in the broad stock market.

Latest Data: The Kiplinger ETF 20

Several factors converged to drag down the sector. Growing unease about high share prices was one–especially for the FAANGs (Facebook, Amazon.com, Apple, Netflix and Google's parent, Alphabet). There were also worries about rising interest rates, increasing inflation and escalating trade tensions. Then came the news about privacy gaps at Facebook, raising the specter of possible regulation, and a barrage of negative tweets from President Trump directed at Amazon. It was a perfect setup for a price tumble, says Anthony Saglimbene, a global market strategist at Ameriprise.

We weren't surprised by the pullback. Months earlier, in 5 Super Low-Cost ETFs, we predicted that tech stocks were due for a breather. In the Kiplinger ETF 20, we swapped a tech-only fund, Vanguard Information Technology (Symbol VGT), for a more diversified, growth-oriented fund, iShares Edge MSCI USA Momentum Factor ETF (MTUM).

It was a well-timed move. Ishares Edge MSCI USA Momentum Factor, which emphasizes companies with rapidly rising share prices, holds a big slug in tech firms–36% of its assets at last word. (Tech stocks make up 25% of Standard & Poor's 500-stock index.) But the fund also has hearty exposure to financials, industrials and firms that make or sell nonessential consumer goods. As a result, the fund held up better than the tech sector during the recent slump, though it still lost ground. And over the past 12 months, ishares Edge MSCI USA Momentum Factor beat its peers–funds that invest in large, growing firms–and tech-only funds.

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Is the recent sell-off in tech shares a sign that the market is shifting away from fast-growing firms? Not yet. The current U.S. economic cycle, albeit in its late stages, bodes well for growth-oriented stocks, especially given the synchronized growth of global economies. That doesn't mean share prices for the sector won't fall further, especially with the wild card of a potential trade war, says Saglimbene. If no trade war materializes, and if earnings growth meets expectations, then investors who can stomach some volatility should step cautiously into tech stocks, he says.

Other news. Following Invesco's acquisition of Guggenheim's ETF division last fall, Guggenheim S&P 500 Equal Weight Health Care Portfolio is now known as Powershares S&P 500 Equal Weight Health Care Portfolio. The symbol, RYH, remains the same.

See Also: 8 Great Biotech ETFs to Buy