Is It Really "Safe" to Invest in Tech ETFs Right Now? Here's What History Suggests.

Investors are currently pondering whether tech stocks are overvalued, on the verge of a correction, or set for additional growth. The Nasdaq-100 index, which consists of numerous tech companies, has surged by 109% over the past five years, thanks to excitement surrounding the AI revolution. However, tech stocks can be unpredictable and risky, with substantial fluctuations in both decline and growth.

Many investors now harbor some skepticism regarding AI stocks, questioning whether AI will indeed generate the anticipated economic expansion and productivity, and which firms will gain the most from it.

For those who remain optimistic about the future of AI and are keen to continue investing in tech, tech exchange-traded funds (ETFs) like the Invesco Nasdaq 100 ETF (QQQM) can provide a straightforward way to invest in the sector. Here are three compelling reasons to be bullish on tech ETFs. First, the tech sector's earnings are robust and experiencing rapid expansion.

According to a report published on October 9 by FactSet, year-over-year earnings growth for the S&P 500's information technology sector reached 65.1% in the third quarter, up from 57% on June 30. FactSet also discovered that 81% of information technology sector companies within the S&P 500 demonstrated an increase in mean earnings per share (EPS) estimates since June 30.

Nvidia, Micron Technology, Dell Technologies, and Intel are among the leading drivers of the tech sector's rise in anticipated earnings this quarter. These are all prominent AI firms that manufacture semiconductors, chips, and servers for companies constructing AI data centers and infrastructure.

Second, the tech sector's increase in expected earnings this quarter can be attributed to the ongoing investments of major AI hyperscalers, such as Alphabet, Meta Platforms, and Microsoft, amounting to hundreds of billions of dollars. These companies are actively investing in AI development, which could sustain their growth. However, the AI boom may not pan out for all companies.

Some hyperscalers may reduce their AI capex, but this does not necessarily signify a stock market collapse similar to the dot-com bubble. Today's tech sector is larger, more profitable, and more diversified than it was during the dot-com era. Consequently, many investors question whether tech stocks are overvalued. Yet, the figures do not strongly support this notion.

Tech stocks may not be inexpensive, but they might be becoming less expensive. As of October 9, the Nasdaq-100 was trading at a price-to-earnings (P/E) ratio of 31.51, which is 6% lower than its 33.55 multiple one year ago. This price decline is not due to falling stock prices, but rather a rise in earnings. The E in the P/E ratio is decreasing as earnings continue to grow, making the multiple smaller.

Lastly, even though it is impossible to predict what will transpire next in the AI trade or the tech sector, investing in tech ETFs like the Invesco Nasdaq 100 ETF (QQQM) could be a prudent decision. This low-cost tech ETF allows investors to own all 100 companies within the tech-heavy Nasdaq-100 index. Over the past five years, it has generated annualized returns of 16.4% (by net asset value).

Although any stock or ETF carries inherent risks, QQQM suffered a significant loss during the 2022 bear market - a 32.45% decline that year. Nevertheless, the Invesco Nasdaq 100 ETF rebounded and delivered strong returns for long-term investors. If you believe in the long-term growth and resilience of the U.S. tech economy, now might still be an opportune moment to invest in this Nasdaq ETF.