tech stocks worth the additional risk?
Companies whose focus is technology have been accounting for an increasing proportion of the total value of the Standard & Poor’s 500 Index over the latest 10 years. Since the giant tech companies have grown more rapidly and now represent 28% of the total, the S&P Index has become more volatile.
The S&P has been largely propelled by a group that had been known as the FAANGs: Facebook, Amazon Apple, Netflix, and Google. The propulsion goes both ways. This year, the combination of a lingering pandemic, hyperinflation, and conflict in Ukraine has sent the investment markets tumbling, with this group leading the way down.
For this reason, it seems worthwhile to think about investing in the broad market in slightly different ways. Since the S&P Index is biased toward the largest companies, it would be interesting to consider the results if all stocks in the index were equally weighted. That would be an exchange-traded fund with the ticker RSP. Another option would be SPXT, an exchange-traded fund with no tech holdings.
People who view the exclusion of tech as heresy may be more interested in investments that are strictly focused on technology. Broader investments would include RYT, an exchange-traded fund with equal-weighted technology holdings, and XSW, which holds shares of software and services companies.
Here are the results: Since 2010, RSP had average annual return of 12.5% compared with an S&P 500 return of 13.0%. Its price fluctuation along the way was lower and its dividend yield is higher (1.8% vs. 1.6%).
The tech-only ETFs were by far the best performers. RYT was up 345% while XSW gained 255%. The three other ETFs climbed half as much, but as one might suspect that’s not the end of the story.
For 2022 to date, the picture has changed dramatically for the worse for tech investments. RYT, the equal-weighted technology ETF, was off 27.5% while XSW, the software and services ETF, dropped almost 34%.
Although most stocks have been pummeled this year, RSP, the equal-weighted S&P 500 ETF and SPXT, which excludes tech stocks, were about 18% lower, not a great result, but better than the S&P Index itself and much better than techs as a group.
Over extended periods, investments in technology stocks may provide greater rewards, but be prepared for big bumps along the way.
N. Russell Wayne, CFP®
Sound Asset Management Inc.
Weston, CT 06883
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