The hottest sector, technology, is the worst victim of tax reform developments. Stocks in this sector have been on a wild ride over the past one week with most of them piling up huge losses. This is because investors are flocking to companies expected to get a bigger boost from the tax reform, which is on its way. It is now pending only the consolidated bill and the final signature by Donald Trump within Christmas.

Notably, this year’s top performing sector slid about 4% over the past week. The ultra-popular Select Sector SPDR Technology ETF (XLK – Free Report) shed 1.7% over the past five days compared with losses of 0.3% for the broad market fund (SPY – Free Report) and 1.3% for Nasdaq ETF (QQQ – Free Report) . XLK saw outflows of about $540 million in the same period.

How Tax Reform Could Hurt The Sector?

According to S&P Global data, the technology sector pays an effective tax rate of 18.5% — the third lowest among U.S. large caps. As such, a reduction of tax rate to 20% would not really benefit the sector. Additionally, the retention of the corporate alternative minimum tax in the Senate version of the tax bill as well as the R&D tax credit is a concern for tech firms.

As tech companies spend higher on research and development, they claim tax credits. However, by lowering the corporate tax rate, it might be harder for them to get this benefit. All these factors are weighing on investors’ sentiment on the technology sector.

ETF Performances

Among the worst performers over the past week, semiconductor ETFs declined the most with PowerShares Dynamic Semiconductors Fund (PSI – Free Report)and First Trust Nasdaq Semiconductor ETF (FTXL – Free Report) plunging 8.8% and 8%, respectively. The hottest ETFs of this year — Guggenheim China Technology ETF (CQQQ – Free Report) and KraneShares CSI China Internet ETF (KWEB – Free Report) — also fell about 8% and 7%, respectively.