Profiting from technology

Americans of every generation have increased adoption rates of new technologies for communication. Due to the coronavirus pandemic, we are utilizing new apps even more via cell phones, tablets and laptops.  Adding technology investments to a portfolio can be a way to potentially higher long-term returns.

Those who were already high on the adoption curve are finding this new environment to be highly efficient, while those who were a little further behind the curve may find it new and exciting thus climbing up the curve rapidly. The coronavirus pandemic has forced us to change the way we interact with one another and conduct our affairs. The pandemic has caused many to shelter in place and limit our social interactions. Instead of simply accepting the fact that we are separated for an undetermined period of time and unable to interact and conduct business – we have adapted to our new environment by adopting new technologies. We have decided that in today’s modern world, people will remain connected regardless of the circumstance and there is no reason not to find a way to profit from it as well.

These technologies are a disruptive agent in our economy and as new technologies are discovered and applied, they too will beget even newer technologies. While we take advantage of new forms of communication, we can also take advantage of this phenomenon in our portfolios. Over the past 5 years, the Information Technology sector rewarded investors with a 17.8% annualized return rate vs. the broader S&P 500 returning 6.9% annualized for the same time period.

Adding technology investments to a portfolio can be a way to potentially higher long-term returns. Tactical allocations properly applied to a portfolio is an excellent way to take advantage of the long-term structural trends in our economy. The question is what is the most efficient way to do this?  There are hundreds of technology companies and technology mutual funds plus dozens of technology-focused indexed ETFs to choose from and they are not all are created alike. Within the sector, there are different sub-groups of companies to choose from including the Semiconductors, Technology Hardware & Equipment and Software & Services. Choosing the right investment vehicle is important in order to get the right exposure to the sector at the right price.

ETFs are a great way to achieve sector exposure, as they invest in the entire index rather than attempt to pick and choose today’s winners. We would suggest looking for a broad-based index of technology companies, yet one that still reflects the concentrated nature of the sector itself. The index should have companies of all market capitalizations and all sub-groups represented. Once an index is selected, the investment in the index should have a low tracking error to its index, a high average daily trade volume for liquidity and a low cost. A sampling of technology focused ETFs is shown below.

All information is as of March 31, 2020.

Vanguard’s Information Technology ETF, symbol VGT, is a good choice. It is ranked at or near the top of most of the criteria and has also had tremendous performance relative to the S&P 500 index. YTD through April 30, 2020, VGT has outperformed the S&P 500 index by 9 percentage points.All information is as of March 31, 2020.

The Information Technology sector is the largest sector of the S&P 500 with a 25.5% weighting as of March 31, 2020. This means that those with an allocation to an S&P 500 fund have a quarter of their investment in technology companies. If you haven’t looked recently, many of today’s technology companies are household names. The same way car, pharmaceutical and energy companies were the household names of yesteryear. The go-go years of the internet bubble are no longer representative of the technology companies today. Instead, think of Microsoft, Apple, Intel and Cisco. Many of these companies offer products and services we use on a daily basis to enhance our lives. Why not also profit from them?

Some Wiser Wealth Management clients’ portfolios may have or have had any one or more of the investments named in this article.

Brad Lyons, CFP®

Posted 5/6/2020

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