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Investors Advised to Hedge Bets on Tech Stocks
Risky Outlook for Tech Stocks
Goldman Sachs is suggesting that investors hedge their bets on tech stocks following a significant rally in the first half of the year. Arun Prakash from Goldman's derivatives research team believes that tech stocks appear unstable and may be due for a pullback. According to Prakash, the recent rally in equities and low implied volatility presents an opportunity to own tail hedges and protect against potential downside risks.
Suggested Hedge Strategy
Goldman Sachs recommends buying 6-month put options on the Technology Select Sector SPDR Fund (XLK) that are 5% out of the money. Put options give holders the right to sell an asset at a predetermined strike price. By purchasing put options that are out of the money, investors limit their downside risk to the premium paid for the contract. This hedge strategy aims to protect against potential losses in the tech sector.
Slowdown Expected in the Second Half of the Year
The XLK, which has seen a 41.8% surge year to date, has shown signs of slowing down recently. In July, the ETF was only up 1.5%. Goldman Sachs predicts that this slowdown will continue in the back half of the year, especially as the October quarter tends to be the most volatile for semiconductors and technology stocks.
Top Holdings and Missing Tech Names
The Technology Select Sector SPDR Fund's top holdings include Apple, Microsoft, and Nvidia. However, it does not hold some of the other Big Tech names like Meta Platforms and Alphabet. This information is important when considering the fund's overall performance and potential risks.
(Note: CNBC's Michael Bloom contributed to this report.)
Conclusion: Implications for New Businesses
Treading Carefully in the Tech Sector
The recent warning from Goldman Sachs to hedge bets on tech stocks has significant implications for new businesses seeking to enter the technology industry. While the tech sector has experienced a substantial rally in the first half of the year, experts believe that it may be entering a period of instability and potential pullback. As new businesses often rely on investor confidence and market stability, it is crucial for them to be aware of the potential risks and take appropriate measures to protect their interests.
Consider Hedging Strategies
One strategy recommended by Goldman Sachs is the purchase of 6-month put options on the Technology Select Sector SPDR Fund (XLK), a popular ETF representing the tech sector. This approach allows investors to limit their downside risk and protect against potential losses. For new businesses venturing into the technology sector, exploring such hedging strategies can provide a safety net against market fluctuations and offer a sense of stability during uncertain times.
Timing and Market Volatility
Goldman Sachs also predicts a slowdown in the tech sector for the second half of the year, with the October quarter typically known for increased volatility. This suggests that new businesses entering the tech industry should carefully time their market entry and consider the potential challenges that may arise during this period. Understanding the market's historical patterns and aligning business plans with anticipated fluctuations could help new ventures navigate the industry more effectively.
Consideration of Holdings and Risks
When evaluating investment options or considering partnerships, new businesses should pay attention to the holdings of relevant ETFs like the XLK. While some prominent tech companies like Apple, Microsoft, and Nvidia are well-represented, the absence of other significant players such as Meta Platforms and Alphabet could affect the fund's performance. New businesses should keep these factors in mind when assessing the potential risks and rewards associated with different investment vehicles.
In summary, the cautionary advice from Goldman Sachs regarding tech stocks serves as a reminder to new businesses to approach the technology sector with prudence. By considering hedging strategies, being mindful of market timing and volatility, and properly evaluating investment options, startups can better protect themselves and position themselves for success in this dynamic industry.
Article First Published at: https://www.cnbc.com/2023/07/25/goldman-sees-risk-of-a-tech-drawdown-tells-clients-to-use-this-hedge.html.svg)
