Last week, I introduced you to my favorite ETFs in the healthcare sector. Today, I focus on the fourth weakest sector, technology. Why? To identify sectors that are outperforming and underperforming the market for portfolio considerations.
Earlier this week, profit-taking continued with the major indexes. Many ask if it will turn into a market correction? My answer, it is way too early to tell. Keep an eye on the sector rotation for clues.
I introduced you to and featured what I call the “new world” technology sectors and funds in previous columns. Today, I focus on funds that contain many “old-world” technology companies. When the pandemic hit, it forced more than 10 years of tech into our lives. Many of these companies exploded with growth, and their prices skyrocket. Earlier this spring, many in these groups topped and are now testing price support.
It will be interesting to see if the “buy the dip” crowd shows up or if the “new world” high-flyers will go back down to their pre-pandemic price.
My favorite “old-world” based technology funds ranked by asset size are as follows:
VGT-Vanguard Information Technology Index Fund ETF tracks companies in the MSCI US Investable Market Index; an index made up of stocks of large, mid-size, and small U.S. companies within the information technology sector; VGT is the largest fund in this group, with assets of 50 B and an average trading volume of 498 K.
XLK-Technology Select Sector SPDR ETF tracks companies in the Technology Select Sector Index. XLK has assets of 39 B and an average trading volume of 8.3 M.
IYW-iShares U.S. Technology ETF tracks companies in the Dow Jones U.S. Technology Capped Index. IYW has assets of 7.3 B and an average trading volume of 801 K.
SOXX-iShares PHLX Semiconductor ETF tracks equities in the semiconductor sector. SOXX has assets of 6.3 B and an average daily trading volume of 1.45 M.
FTEC-Fidelity MSCI Information Technology Index ETF tracks companies in the MSCI USA IMI Information Technology Index. FXH has assets of 5.4 B and an average trading volume of 309 K, the lowest traded volume in this group.
SMH-VanEck Vectors Semiconductor ETF tracks equities in the Market Vectors U.S. Listed Semiconductor 25 Index, including common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor industry. SMH is the smallest in the group, with assets of 5.36 B and an average daily trading volume of 4.7 M.
I charted the performance of each fund beginning March 24, 2020, running to real-time. The results and returns by rank are as follows:
SMH-VanEck Vectors Semiconductor ETF (blue line) up 115.22%, SOXX-iShares PHLX Semiconductor ETF (red line) up 115.17%, IYW-iShares U.S. Technology ETF (green line) up 92.59%, VGT-Vanguard Information Technology Index Fund ETF (pink line) up 91.76%. FTEC-Fidelity MSCI Information Technology Index ETF (purple line) up 91.34%. The group laggard, XLK-Technology Select Sector SPDR ETF (black line), up 88.31%. The market, $SPX (green area), is up 82.32%.
Here are the key points:
1. Bigger is not always better. The second largest fund XLK, was the lowest performer in this group, outperforming the market ($SPX) by 5.99%.
2. The smallest fund, SMH, was the top performer and outperformed the market ($SPX) by 32.9%.
3. All of these technology funds outperformed the returns of the market ($SPX).
4. These results represent a specific period. Different dates will result in different outcomes.
5. Past performance does not dictate future returns.
Here is what you should think about:
First, if you own similar technology funds, how are they performing compared to these funds?
Second, do you know the top 10 holdings in your tech funds?
Third, if you are not tracking your technology funds' performance, then why?
No one knows when the next large-scale selling begins. The current sector action is signaling that a market top may be in, but it usually takes three to four weeks to get an accurate picture.
I will be watching to see if profit-taking continues within the top-performing sectors and more money flow into healthcare, utility, and consumer staple funds. When this happens, the institutions will short the previous high-flyers and long the sectors moving up.
What's next? I update the overall sector performance and focus on my favorite consumer discretionary funds.
In full disclosure, I do not hold any securities in this column.
Plan your work, work your plan, and share your harvest!
David O. England is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to firstname.lastname@example.org.