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Technology has turned out to be the most profitable sector on Wall Street this year, with the “magnificent seven” being the outperformers. These stocks — Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL, GOOG), Amazon (AMZN), Meta Platforms (META), and Tesla (TSLA) — have collectively contributed a staggering $3.9 trillion in market capitalization since the beginning of the year.

This amazing growth has been fueled by an enthusiastic demand for artificial intelligence (AI) technologies and the bets that the Fed will soon end its tightening policy. However, the rally slowed down lately as investors turned their focus to other sectors amid broad market gains. Additionally, the news of Fitch’s downgrade of U.S. debt took a toll on overall sentiment last week.

Fitch Ratings downgraded the U.S. credit rating to AA+ from AAA, citing “expected fiscal deterioration over the next three years,” an erosion of governance and a growing general debt burden. This has led to a strong sell-off in the stocks and a surge in yields, thereby hurting technology stocks. The beaten-down prices offer a solid buying opportunity for investors.

We have highlighted five ETFs that declined the most last week but have a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy). These products, namely, Invesco Dynamic Software ETF (PSJ - Free Report), SPDR S&P Internet ETF (XWEB - Free Report), WisdomTree Cloud Computing Fund (WCLD - Free Report), Invesco DWA Technology Momentum ETF (PTF - Free Report) and ProShares Big Data Refiners ETF (DAT - Free Report) are poised to outperform when the market resumes its uptrend.

Strong Earnings Trend

Second-quarter earnings of the tech sector have been solid so far. Total earnings from 80.9% of the sector’s market capitalization in the S&P 500 index are down 2.3% from the same period last year on 0.2% lower revenues, with 82.8% beating EPS estimates and 79.3% beating revenue estimates.

The second-quarter earnings decline of 2.3% is much less than the decline of 13.1% in the first quarter, 19.1% in fourth-quarter 2022, 13.8% in third-quarter 2022, and 9.1% in second-quarter 2022. The EPS beat percentage is also tracking above the group of companies in the last three quarters. Though the revenue beat ratio is tracking below the preceding quarter, it is modestly above the historical average.

Overall, the tech sector is on track to bring in $119.6 billion in earnings for the second quarter compared with $117.5 billion in the year-ago quarter. This will represent the first period of growth for the sector after four back-to-back declines. For the Big 7 Tech Players, second-quarter earnings are expected to be up 20.4% from the same period last year on 9% higher revenues.

Other Factors

The AI mania will continue to accelerate and provide a boost to the tech stocks. The tech titans have strong balance sheets, durable revenue streams and robust profit margins, making them attractive investments. They are better positioned to withstand a possible economic downturn and have demonstrated improved cost discipline.

Further, the long-term outlook for the sector remains strong, given that the global digital shift has accelerated e-commerce for everything, ranging from remote working to entertainment and shopping. The rapid adoption of cloud computing, big data, the Internet of Things, wearables, VR headsets, drones, virtual reality, machine learning, digital communication, blockchain and 5G technology should continue to fuel a rally.

Let’s dig into the details of the abovementioned ETFs:

Invesco Dynamic Software ETF (PSJ) – Down 8.1%

Invesco Dynamic Software ETF offers exposure to the companies that are principally engaged in the research, design, production or distribution of products or processes that relate to software applications and systems and information-based services. It has amassed $181.9 million in its asset base and charges 56 bps in annual fees. PSJ has a Zacks ETF Rank #2.

SPDR S&P Internet ETF (XWEB) — Down 6.8%

SPDR S&P Internet ETF targets the Internet corner of the broad tech space and follows the S&P Internet Select Industry Index. It charges 35 bps in annual fees. With an AUM of $23 million, XWEB carries a Zacks ETF Rank #2.

WisdomTree Cloud Computing Fund (WCLD) – Down 6.1%

WisdomTree Cloud Computing Fund offers exposure to emerging and fast-growing U.S.-listed companies (including ADRs) that are primarily focused on cloud software and services, and follow the BVP Nasdaq Emerging Cloud Index. It charges investors 45 bps in fees per year. WisdomTree Cloud Computing Fund has amassed 22.1 million in its asset base and has a Zacks ETF Rank #1.

Invesco DWA Technology Momentum ETF (PTF) – Down 5.9%

Invesco DWA Technology Momentum ETF offers exposure to 35 tech companies that are showing relative strength (momentum) by tracking the Dorsey Wright Technology Technical Leaders Index. Software takes the largest share at 53.3%, followed by semiconductor & equipment (24.4%), and technology, hardware, storage and peripherals (13%). Invesco DWA Technology Momentum ETF is relatively illiquid and unpopular, with AUM of $292.3 million. It charges 60 bps in annual fees and has a Zacks ETF Rank #1.

ProShares Big Data Refiners ETF (DAT) – Down 5.8%

ProShares Big Data Refiners ETF invests in companies that help businesses process massive amounts of data to draw competitive insights. It tracks the FactSet Big Data Refiners Index and holds 32 stocks in its basket. ProShares Big Data Refiners ETF has amassed $3.6 million in its asset base and charges 58 bps in annual fees. It has a Zacks ETF Rank #2.

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