Why Technology Should Be In Most Portfolios
Although it is well known that the odds are against investors trying to do better than the leading market indexes, there remains the temptation to be among the few who have actually succeeded in outperforming. Since stock prices over time reflect changes in underlying earnings, it should be rather obvious that the task of coming out ahead will depend on picking sectors that traditionally have grown more rapidly than industry generally.
That eliminates areas such as basic materials, construction, industrial goods, and insurance, which all have cyclical tendencies. It also eliminates consumer staples and utilities, which grow steadily, but slowly.
Not only that, but the performance of utility shares directly reflects the comparison of their dividend yields with that of prevailing interest rates since these stocks are usually viewed as income providers. When utilities raise their dividends regularly, their shares will hold their own. But when rates rise and dividends are flat, the prices of utility shares will fall. Given the likelihood of rising interest rates over the next few years, increased care in selecting these stocks will be required.
What's left are financials, health care, and technology, the latter two of which have traditionally been sector standouts.
To put the picture in perspective, I tallied the returns from these three sectors from the market bottom on March 9, 2009 through April 16, 2021 and compared the results to the Standard &Poor’s 500 Index. I used the following as proxies for the three sectors: XLF (Financial Select Sector SPDR ETF), PRHSX (T. Rowe Price Health Sciences Fund), and XLK (Technology Select SPDR ETF). XLF and XLK are passive exchange-traded funds, while the Price mutual fund is actively managed.
As one would expect, the gains over the 12-year period were unusually broad, averaging more than 400%, but only one fund was a standout and the interim price volatility varied considerably. Although the returns were strong, there was a hefty measure of risk.
The top performer over the period was XLK, the technology ETF, which gained 808%, almost twice that of the S&P index, which was up 421%. T. Rowe Price's Health Sciences Fund was the second-best performer, rising 539%. The disappointment in the group was XLF, the Financial Services ETF, which had a strong rebound immediately after the 2008-09 crisis, but it ended up at the bottom of the pack with a gain of 389%.
For the first 10 years measured, the volatility of these funds remained within a relatively normal range. But since then, price fluctuations increased across the board, especially for XLK.
These numbers represent what took place during a period of exceptional returns since they were measured from the bottom of the market crash of 2008-9. Still, they demonstrate using a short time slice that both technology and health care should be considered important components of most portfolios. Even if a period of decades had been used, the result would have been similar.
Although I selected these funds as examples of the kinds of returns that would have been provided by investments in these sectors, there are quite a few others that could have been used. The underlying holdings might have differed, though the result probably would not have been dramatically different.
N. Russell Wayne, CFP®
Sound Asset Management Inc.
Weston, CT 06883
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