Moreover, the utility ETF XLU fell precipitously following news of the Coronavirus, dropping 36% from late February to late March. The recovery that followed from the March 23 lows, still places XLU at 14.8% below its pre-Covid highs. The story in no better in real estate, with the IYR falling 57% peak to trough and currently down 10.24% on the year. Even the consumer staples ETF (XLP) following not-so-distant memories of store shelves emptied of paper products, cereal, pasta and cleaning supplies, fell 16% at the outset of the crisis and stands just 5.5% up on the year.
So if the traditional defensive sectors were not where investors were hiding in troubled times, where did they go? In a word, technology. The XLK towers above other sectors this year, with a total return to date of 35.8%. But what's most interesting is that the XLK actually fell less than traditional defensive sectors like utilities and real estate, during the early days of the crisis, before rallying back hard in the ensuing months.
Here's what has been driving tech equity performance and why it's still relevant to investors today. Large tech companies showed their resilience to the crisis, with many companies posting solid revenue and earnings growth in Q1 and Q2 vs similar periods in 2019. Investors now increasingly believe that Amazon, Netflix, Apple and Microsoft, among others, are impervious to cyclical employment and broad measures of consumer demand. With interest rates on hold, the discounted present value of tech earnings creates considerable value to support earnings multiples and valuations.
While diversification is essential to portfolio management, tech very likely will continue to outperform amidst growing uncertainty around the election, vaccine development and the restart of the economy.
