Tech Stocks On a Run; ETF's To Buy 'IF' you Think It Will Soon Come to An End

Matt Thalman - INO.com Contributor - ETFs


The Bears have been referring to the current situation with technology stocks as the building up of the next dot com collapse. Price to earnings ratios are high, earnings expectation may be overinflated, and the unknown that surrounds all aspects of the current political landscape and how that could affect businesses are all reasons to be doubtful that technology stocks can continue on their massive run.

One analyst believes you should buy any of the technology stocks that garner a large portion of their revenue from advertisements. The analysts noted that companies like Facebook (NYSE:FB) and Alphabet (NASDAQ:GOOG) are likely to experience a revenue slowdown in the future because, at the end of the day, there is only so much money that can be thrown at web-based advertising.

Others think Amazon.com (NASDAQ:AMZN) may be getting too big and trying to do too much, and it could end up destroying itself. Sounds similar to what the bears say about Tesla (NASDAQ:TSLA).

At the end of the day, a negative case can be made about every single technology stock. If you agree with those cases and you want to start looking for some opportunities to make money when technology stocks start falling, then let's take a look at some or your options I have outlined below.

The first option would be something like the Direxion Daily Technology Bear ETF (PACF:TECZ). This is a 1X short ETF which gives investors exposure to market-cap weighted US S&P 500 technology stocks. This is one of the purest ways to short the technology industry as a whole, with limited risk. (Note, you are taking on risk anytime you invest, even more, when you short equities, but compared to other investments, this option is of lesser risk.) The TECZ will reset daily, thus if you hold it for longer than one day at a time, the fund itself will eat into possible profits if technology stocks do turn for the worse. But regardless of the self-imposed penalty TECZ has, it would still be one of your better options if you want to make a bet against technology stocks and you don’t have a specific timeline of when that industry will begin to fall.

Perhaps you think technology stocks are going to start declining tomorrow? Well, then you could buy the Direxion Daily Technology Bear 3X ETF (PACF:TECS). This is a 3 times short leveraged ETF which gives you exposure to large cap US technology companies. The way this ETF works is when technology stocks are declining, the investor will make the amount of the decline times three. But, the opposite will also happen and for example, since 2017 has been a great year for tech stocks, TECS is actually down 43.77% year-to-date.

Another way to play technology stocks falling would be simply to buy the ProShares Short S&P 500 ETF (PACF:SH) or the Direxion Daily S&P 500 Bear 3X ETF (PACF:SPXS). These two ETF's will allow you to short the S&P 500 as a whole and since technology stocks make up a very large portion of the S&P 500, this will give you that exposure to falling tech stocks. Furthermore, if you really think technology stocks as a whole are going to see a big decline in the future, one would have to imagine that we could see another dot-com like recession.

In 2001, the tech stocks fell first, but that dominos where started and the effect hurt the whole economy. If that happens again, the S&P 500 and none technology stocks would also fall, meaning if you shorted the whole index, you could experience some really big gains.

While the ProShares Short ETF is a non-leveraged investment, the Direxion Daily S&P Bear ETF is leveraged 3X, meaning it should not be used as a long term investment option. As I have spoken about in the past, anything that has leverage is going to lose value on a daily basis due to the fund needing to buy and sell certain investments in-order to get the leverage.

Finally thought to remember is that anytime you 'short' an investment you need to remember that your maximum possible gain on that investment is going to be 100% since a stock can only decline by 100%. But, your maximum possible loss on that investment could be infinite, because a stock never technically has to stop rising. Just something to remember before you go all-in on shorting technology stocks.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor owned shares of Facebook, Amazon, Tesla, and Alphabet at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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