After a great start to 2023, Wall Street started to waver in the second half as the inflation is still hot and rates are likely to remain higher for longer. Though the Fed has stayed put in September, the U.S. central banks indicated that rates will remain higher for longer. No rate cuts are expected in the near term.

Growth stocks that the tech-heavy Nasdaq primarily hold underperform in a rising rate environment. Hence, the index-100 ETF Invesco QQQ Trust QQQ slumped 1.6% past month (as of Sep 22, 2023) while the S&P 500 lost 1.8%.

Is the Worry for Higher Rates Exaggerated?

We believe that no matter if the Fed hikes, pauses, or cuts, tech investing will be in fine fettle this year due to the AI boom and the perception that the era of rock-bottom rates is over. Both tech and higher rates are the new normal, and investors are becoming accustomed to it. According to a recent note by Wedbush analyst Dan Ives, the technology sector is poised to weather a prolonged phase of increased interest rates, per a Business Insider article, as quoted on Yahoo Finance.

2023’s AI Frenzy Is Not Same As 2000’s Tech Bubble

The dramatic rise in big tech companies won’t come to an end like what the industry saw after the tech boom of the 1990s, according to some on Wall Street, as quoted on Yahoo. Dan Ives commented that “don’t be unnerved by the Federal Reserve’s and macroeconomic factors. Instead, focus on the imminent, most significant tech revolution we’ve seen in three decades,” per the above-mentioned article.

He also hinted that any prospective reductions in interest rates – with the market forecasting at least two for the next year – coupled with the ongoing rise of artificial intelligence, could catalyze a “risk-on environment.” Jefferies equity analyst Mark Lipacis believes that 1990s saw companies invest into a Field of Dreams-esque. But AI transformation is hard-core reality.

AI’s potential has already boosted the earnings outlook for leading tech firms such as Nvidia, Microsoft, and Adobe. Ives also mentioned that preliminary assessments of corporate IT expenditure show a slight uptick, indicating a favorable trend for software, semiconductors, and digital media equities.

Per Nvidia founder & CEO Jensen Huang, demand for our data center platform for AI is huge and broad-based. According to Huang’s estimate, the value of data centers within cloud and enterprise software systems is around $1 trillion.

ETFs in Focus

Against this backdrop, below we highlight a few tech ETFs that could be up for gains in the ongoing AI transition process.

Global X Robotics & Artificial Intelligence ETF BOTZ

The underlying Indxx Global Robotics & Artificial Intelligence Thematic Index invests in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence, including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles. The fund charges 69 bps in fees.

SPDR S&P Software & Services ETF XSW

The underlying S&P Software & Services Select Industry Index represents the software sub-industry portion of the S&P Total Stock Market Index. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Global Select Market. The Software Index is a modified equal weight index. The fund has a Zacks Rank #2 (Buy).

VanEck Semiconductor ETF SMH

The underlying MVIS US Listed Semiconductor 25 Index tracks the overall performance of companies involved in semiconductor production and equipment. The fund has a Zacks Rank #2 and charges 35 bps in fees.

First Trust Cloud Computing ETF SKYY

The underlying ISE Cloud Computing Index is a modified market capitalization weighted index designed to track the performance of companies actively involved in the cloud computing industry. The Zacks Rank #2 fund charges 35 bps in fees.
Invesco QQQ (QQQ): ETF Research Reports

VanEck Semiconductor ETF (SMH): ETF Research Reports

First Trust Cloud Computing ETF (SKYY): ETF Research Reports

SPDR S&P Software & Services ETF (XSW): ETF Research Reports

Global X Robotics & Artificial Intelligence ETF (BOTZ): ETF Research Reports

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