Let’s face it – nobody actually needs to create a distinct space in their portfolios for a sector-specific area like technology. You gain exposure to the sector by virtue of being invested in broad-based funds that invest across all industry sectors. Sector funds are generally riskier propositions because they’re more susceptible to things that have a greater impact on that sector relative to the market at large. That being said, there are investors who are passionate about different industries or companies or who have industry-specific knowledge they seek to translate into investment success. There’s also investors who simply enjoy the challenge of allocating a percentage (it should be a modest percentage relative to the total portfolio) for a tactical allocation slotted for intermediate-term speculation in assets like sector funds.
The technology sector broadly includes information technology like computer software, hardware and equipment. So-called “Internet” companies may be included in the tech sector, but as the Internet becomes more of a commoditized utility and less of a novelty (as was the case 15 years ago during the dot-com boom) these companies may find themselves in other sectors. Amazon (AMZN), after all, is more of a retail company than a technology company these days. Tech stocks can be quite volatile, growing strongly in economic upswings and falling hard during recessionary environments.
Case Study: Matt Fitzpatrick
Matt Fitzpatrick is 27 years old and single. He works at an ad agency in a major urban area and enjoys an active lifestyle with a great deal of company travel and business entertainment that keeps his own personal consumption needs relatively low. Matt enjoys his lifestyle and has no immediate plans to settle down, though he imagines that will happen sometime in his early to mid 30s.
Matt is a bit of a risk taker and likes the thrill of making wagers: he is an enthusiastic member of office fantasy football and March Madness pools and will confess to enjoying the occasional weekend in Vegas. But when it comes to his portfolio, Matt is a bit more serious – he knows that building wealth is important and plans to start early. But he likes the idea of having about a 10% allocation to what he considers tactical bets on trends or developments he thinks he might be seeing. An avid early adopter of the latest tech gadgets, Matt thinks tech sector funds are a natural candidate for this part of his portfolio.
According to our research, the following three funds are his top choices:
These are from a pool of 55 funds with a track record of at least ten years.
When compared to the S&P 500 (using the Vanguard index fund VFINX as a proxy) the tech sector has been a strong contributor to gains in the past several years. All the top funds shown here have good performance relative to the broad market over different time periods.
As a risk taker, Matt is not bothered by the higher volatility implied by the standard deviation numbers relative to the benchmark. Standard deviation is a common measure of investment risk and reflects the tendency of tech stocks generally to go up more or down more than market averages in bull and bear cycles respectively. In terms of costs, something Matt does tend to pay close attention to, the expense ratios for the funds are all below 1%, which is actually fairly competitive for actively managed sector funds.
But it’s not all pretty in the tech sector. Here are the laggards in the tech sector space, for reasons that include poor total return performance along with slightly higher risk metrics and unnecessarily higher expenses.
Whether choosing funds for long-term investment goals or allocating a small percentage of your portfolio for intermediate tactical plays, it is always a good idea to pay close attention to performance in the areas that matter most to you—whether that be long or short term total returns, risk, management team tenure or fees.
Keep in mind that generic fund rankings are not going to give you insights into how fund performance relates to your own unique investment needs. And watch out for brokers trying to sell you whatever funds their firm happens to be pushing that week—they may include those funds at the bottom of the pile that you want to stay away from.
Jemstep Inc. is a free online financial advisor that helps individual investors make better investment decisions and achieve their financial goals faster. Jemstep’s investment evaluations, based on patented technology and objective market data, are unbiased and transparent. Jemstep does not accept paid listings or sponsorships that influence its fund rankings in any way, nor does it factor subjective user reviews into the guidance it provides. A privately owned company with headquarters in the heart of Silicon Valley, Jemstep is a registered investment advisor under the rules and regulations of the U.S. Securities and Exchange Commission. To learn more, please visit www.jemstep.com. For a free, easy way and objective way to find the best investments for you, visit Jemstep.com.