The IT space has been one of the worse performing sectors of the year so far and has been going through a rough patch. After the Covid-19 pandemic, these IT companies were flying high at hefty valuations as the world seemed to rely heavily on the IT infrastructure to continue working remotely.
However as the pandemic faded, these valuations started to look a bit over the top, which eventually resulted in a decent selling spree by investors. The concerns over aggressive rate hikes have also dented their valuations, making their future earnings look less lucrative. The soaring inflation has also bumped up their spending on employees to put a leash on the high attrition rate which seems to be an industry-wide problem.
However, these IT stocks have been beaten down to a level where investors are again finding them attractive. What’s more lucrative for this sector is the record plunge in the rupee against the US dollar. The Indian rupee has fallen over 5% this year, to over INR 78 per dollar and is benefitting exporters of the country, among which the IT sector is one of the major ones.
On the charts, the Nifty IT index, which constitutes 10 prominent IT stocks including giants such as Tata Consultancy (NS: TCS ) Services, Infosys (NS: INFY ), Wipro (NS: WIPR ) etc. has been rising on the back of a bullish divergence which is one of the early indicators of a trend reversal. After falling steeply since April 2022, the sector seems to have bottomed out, at least for the short term.
But, the bigger question is how to capitalize on this sector? One of the ways is to buy individual stocks from the sector, but that would require some level of expertise as to which companies to add to the portfolio and at what price. Also, the weightage of these stocks in the portfolio also matters.
However, an easier way is to take exposure to Nifty IT itself. As Nifty IT does not trade on exchanges, investors have an option to add an ETF based on Nifty IT to their portfolios. An ETF is a ready-made portfolio of securities that tracks an underlying asset, index etc. One of the biggest advantages of ETFs is, that an investor does not need to rebalance the portfolio, decide on which stocks to enter or exit etc. as everything is being taken care of by the fund manager.
If there is a rebalancing in the Nifty IT index, the fund manager would also be rebalancing the ETF which is based on that index. Hence, an ETF can be looked at as a proxy to its underlying index or any other asset which it tracks.
There are several Nifty IT-based ETFs on offering such as Nippon India ETF Nifty IT (NS: NIPD ), ICICI Prudential (LON: PRU ) IT ETF (NS: IICR ), SBI ETF IT (NS: SIFN ) etc. One thing to note is although all ETFs track the same index, their returns might be slightly different due to tracking error which could be due to higher impact cost, inefficient trade execution etc.
Disclaimer: None of the ETFs mentioned above is a recommendation to buy, sell or hold. Investors must do their own due diligence before making an investment decision.
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