Daniel Hai

About the Author Daniel Hai

I am a financial quant analyst using systematic data to identify investment opportunities in the long and short term. I write about stocks, ETF's, commodities and currencies. I hold an economics degree from the university of Berlin and specialize in C#/VBA trading algorithms.

Why the technology sector is so attractive right now: XLK, VGT, FDN, IYW

It doesn’t take a market guru to know why private investors love the technology sector. Big names in innovation such as Apple, Microsoft, Facebook and Google are leading the sector. These investor favorites, just between them, account for 35% of the popular Technology Select Sector SPDR Fund (XLK) holdings. In April we might see the sector in the green for the first time since 2016, and there are 3 reasons that the bull sector might continue into 2017.

Technology has so far enjoyed micro-based growth and competition, with single companies redefining their industries year over year. Most market spaces are now nearly completely saturated and filled by a specific company. For example, Apple dominates the high end smartphone market, Google has completely gobbled up the search engine and is quickly expanding in the mobile operating market, and Microsoft continues to dominate the desktop OS market. Needless to say, the social media market is nearly 100% controlled by Facebook, and for these markets there is no foreseeable change in the near future.

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However, we are now living in an exciting new era of Macro technology growth. After dominating their industries, these tech giants are aggressively perusing new markets, each having a potentially disruptive effect. For example, Facebook will have a hard time increasing its revenue from social media growth, but new ventures in virtual reality might compensate for this. So why is the technology market so hot right now? Let’s find out.

1. Artificial Intelligence

This field is has been around for a while, but recent growth in computational power enables new deep learning systems to accomplish tasks unthinkable for a computer to solve just 15 years ago. DeepMind demonstrated the power of A.I this year by creating a algorithms able to beat a human professional at Go (A complex Chinese board game thought to be unsolvable for AI). Another example of A.I is Microsoft Brain, which open sources its artificial intelligence framework used to power Cortana’s (OS assistant) speech recognition. Goole is also in the AI game, open sourcing its own artificial intelligence engine TensorFlow, which powers voice recognition on its search engine and Adriod OS. All major tech firms are heavily investing in AI to improve their services and ensure they are at the forefront of the AI revolution.

Top Tech Firms with exposure to AI: IBM, Google, Facebook, Microsoft

2. Autonomous Driving

Hey, car companies are reserved for the consumer goods sector aren’t they? Not anymore. Technology has slowly made a transition into the lucrative automobile industry. Google’s self-driving cars have generated huge headlines with a near perfect driving record. Apple is rumored to be entering the market, with various engineers in the field already being hired by the Tech giant. Tesla, although not classified as a tech company, is without a doubt at leading this revolution. It is perhaps a prime example of how technology is no longer limited to its own sector, and can rather seamlessly transition into other sectors. Will Toyota, Volkswagen, and General Motors cars soon be replaced by Google, Apple, and Tesla cars? Surprisingly, it does not matter. Even gas cars are becoming “smart” and have to allocate a larger portion on their costs to companies such as Mobileye which provides vision-based advanced driver assistance systems. These support companies benefit from the market without having to actually compete in it (this is not to say that Mobileye doesn’t face fierce competition in the technology sector). Another example is Tesla selling its battery packs and technologies to the more transitional car manufacturers.

Top Tech Firms with exposure to Autonomous driving: Google, Mobileye with an honorable mention to Tesla and perhaps Apple in the future (Tesla CEO Elon Musk to referred to the Apple Car as an “open secret” in the car industry).

3. Virtual Reality and Augmented Reality

The explosion taking place in this market is remarkable. The applications of VR and AR are so wide that it will be involved in everything we do – they are literally endless. Healthcare, education, medicine, research, gaming and socializing are all about to be turned upside down. The technology is being pursued most notably by Facebook via its Oculus rift acquisition, and Microsoft HoloLens. Motion sensing combined with VR and possibly exoskeletons can enable us to interact with the virtual world in complete immersion.


In the future medical students could perform a surgery on a 3d model in virtual reality. Hand motion tracking will allow the virtual model to react to their actions (such as the incision appearing of the model). Furthermore an exoskeleton will allow the student in the VR world to feel the actual resistance created from his actions.

Top Tech Firms with exposure to Virtual Reality: Google, Facebook, Microsoft

While this is perhaps a bit more subjective, being the largest tech company in the world and by far the largest holding within the XLK fund, Apple seems to be falling behind on innovation (in the revolutionary sense of the word, not small increments). Meanwhile Google, under the Alphabet umbrella, is experimenting with many more cutting edge technologies. However, both still boast high profit margins and are expected to continue their growth and dominance alongside the other leaders in the tech sector.

Here is where the XLK fund stands right now in comparison to other sectors since 2016.

Switching between sectors at the right time known as sector rotation is an extremely high Alpha proven strategy. Learn more at GoSector on how to do this properly to maximize your returns.