Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Are technology funds worth a look?

Sachin Nagarajan  |  08 Dec 2020Text size  Decrease  Increase  |  
Email to Friend

Technology stocks have done very well in recent years, and since the coronavirus pandemic, their performance has only improved. Many have surged as stay-at-home orders and an increase in telecommuting and home entertainment spurred demand for their products and services. As of 16 November 2020, the Morningstar US Technology Index is up 37 per cent. The Morningstar Asia Pacific Technology Index, which contains exposure to companines like Samsung and Afterpay (ASX: APT), is similarly up 37 per cent this year.

Investors who expect the tech sector to continue to outperform might be tempted to buy some major technology stocks. An alternative for those who don’t want to pick individual stocks is a tech-sector fund. Morningstar data shows that US tech-sector funds have had inflows of nearly $15 billion in new investments for the year to date through October, even as equity funds overall saw outflows. The only categories more popular than the tech sector were fixed-income categories and commodities funds, which investors see as safe havens when the stocks market seems risky or is in a downturn.

Though the tech sector might not be the most attractive right now from a valuation perspective (we’ll discuss more below), sector funds can be sound investments if used thoughtfully.

Sector funds allow investors to own a particular corner of the market. For example, State Street offers 11 sector funds in the US that focus on the 11 broad sectors that make up the S&P 500, such as energy, financials, and technology. Its Technology Select Sector SPDR ETF (XLK) is one of the biggest sector exchange-traded funds, with more than $36 billion in assets. For investors who want to focus on a specific industry, there are funds that invest at the subsector level. For example, iShares Nasdaq Biotechnology ETF (IBB) is the largest subsector fund with more than $9 billion in assets. On the ASX, the S&P/ASX Australian Technology ETF (ASX: ATEC) has assets of $159 million. 

Watch your weightings

Investors can use funds like these to over- or underweight sectors and industries, in line with their own investment goals.

Before investing in a sector fund, it makes sense to first determine how much exposure you already have to that sector. It might be more than you think.

Consider a portfolio that is fully invested in the S&P 500. That diversified index still had 24 per cent in tech as of 16 November, 2020, a stake much higher than the second-largest sector, healthcare, at 14 per cent. Investors who added a tech fund on top of that might end up with much more exposure to the sector than they’d intended.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Some argue the S&P 500’s increasing technology concentration is cause for concern. High valuations in the tech sector are something to be aware of before diving in.

Think strategically

One could instead offset the S&P 500’s tech exposure by investing in sectors that make up smaller portions of the broad index. These include basic materials, energy, or real estate, each of which comprise less than 3 per cent of the S&P 500. Such a strategy might be driven by a desire for more dividend income, for example.

Valuation is another way to approach sector fund investing, one that reduces the price risk inherent in following popular trends such as technology today, with the caveat that value stocks may require patience. As of 9 November, the most undervalued sectors in the US are energy, consumer cyclical, and real estate, which energy having by far the largest percentage of stocks with Morningstar Ratings of 4- or 5-stars, accounting for 19 per cent.

Keep your sector funds allocation small

Because of their concentrated exposure, most investors shouldn’t allocate large portions to these investments. Sector funds are safer when used as a small percentage of a well-diversified portfolio.

is a Morningstar customer support representative.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend