Funds Betting Big on Tech

A version of this article was originally published in the November 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

During the dot-com bubble in the late 1990s, the rally was fueled largely by a handful of technology stocks. Other sectors, especially value-oriented ones like energy and consumer staples, were mostly ignored, if not outright shunned.

The current rally in U.S. stocks, which is now the second longest in history, has been broader-based. But technology stocks have still led the way. (It should be noted, though, that in contrast to the late '90s, this batch of market leaders is generally very profitable with strong competitive advantages. So, while their price multiples may still be elevated, the businesses themselves are far less speculative.) Tech stocks have been the best performers so far in 2017 and over the trailing three and five years as well, nipping financial-services stocks on average over the latter period.

Naturally, funds that have loaded up on tech have generally prospered. The top four large-blend performers year to date through November all have overweightings in tech, led by Leland Thomson Reuters Venture Capital Index’s LDVAX 62%. (File that name away, as it conjures memories of Internet-related funds from the 1990s.) Note that because of the success of tech stocks, they are now a larger portion of most major indexes. As a percentage of the S&P 500, tech grew from 17.7% in July 2013 to 24.4% as of October 2017.

So, it’s worth noting when a fund has a significant overweighting in a sector that also claims a growing portion of the overall market. Investors should always be aware of major sector bets among the funds they own. But this goes double for a sector that’s a market leader. Given its strength during the current bull market, tech could very well be at risk during the next correction or bear market. With this in mind, we highlight a handful of funds that are highly tech-heavy.

Betting Big on Tech

Keep in mind that Fidelity OTC is not the only Fidelity fund with a big tech overweighting. Siblings

To be sure, many funds with big tech weightings have prospered as a result. Both Fidelity OTC and Touchstone Sands Capital Select Growth were in or close to the large-growth Morningstar Category’s top decile for the year to date through November. But investors should be aware of the risks they are taking. Funds with big overweightings in the market-leading sector often get hit the hardest during the next sell-off.