In Tech’s Bust, Not All Equity Funds Fall Equally — Or At All

Ali Khan, co-head of the technology sector at Fidelity Investments, has spent most of the past few months overseeing some of the very few tech mutual funds still in the green since last fall. Its returns have never been huge – the Fidelity Select Tech Hardware Wallet (FDCPX) rose just 1.4% from Oct. 31 to January – and have withered since Russia invaded Ukraine last month. . Yet with the benchmark Invesco QQQ Trust ETF (QQQ), which tracks the Nasdaq-100 index, down 16% year-to-date, a handful of tech funds look like the best-painted houses in the world. a tough neighborhood.

So why are Mr. Khan’s top funds close to flat when other tech funds have lost half or more of their value?

“Our results reflect the distribution across technology sub-sectors, but it’s more than sub-sectors,” says Khan. “In many of them, the performance is concentrated on a few names.”

The tech bust, it seems, doesn’t treat all companies, sectors or funds the same. Instead, there are clear lines on who loses the most, who loses a little and who may even make a profit, says Robby Greengold, strategist at Chicago fund research firm Morningstar.

For tech fund returns in recent months, the most important return driver was fund style, Greengold says. “Those exposed to aggressive growth have lost double digits, some of them close to 30% or 40%. Those who are more balanced have been much more resilient.

Wide range

The performance range is wide. Of the 153 tech funds tracked by Morningstar, the top saw its price increase by just 2% between Nov. 1 and Feb. 28, according to Morningstar data. It was iShares North American Tech-Multimedia Networking ETF (IGN). The worst performer, VanEck Digital Transformation ETF (DAPP), lost almost half of its value in three months, with its top holdings dominated by cryptocurrency games. Only three technology funds had positive returns for the period in question.

Technically underperforming

Three-month rolling returns for tech-focused mutual funds and ETFs relative to their risk-taking:

The higher the value growth score, the higher the exposure to growth stocks

Morningstar Value-Growth Score

The higher the value growth score, the higher the exposure to growth stocks

Morningstar Value-Growth Score

The higher the value growth score, the higher the exposure to growth stocks

Morningstar Value-Growth Score

The higher the value growth score, the higher the exposure to growth stocks

Morningstar Value-Growth Score

The higher the value growth score, the higher the exposure to growth stocks

Morningstar Value-Growth Score

A few themes have weathered the storm better than others. Dividend tech funds and semiconductor-focused tech funds have held up quite well, serving as a relative haven from the market’s new skepticism of high earnings multiples and promises that earnings will come in the future. At Fidelity, two of the three funds that were in the green until the Ukraine crisis fell into one of these two categories, and the third was an Apple AAPL-focused technology hardware fund. -1.84%

and telecommunications equipment companies.

Morningstar says there is a direct correlation between how aggressive a fund is and the extent of its recent damage. (See chart.) More aggressive funds had more exposure to stocks with extremely high price-to-earnings ratios that investors are wary of, says First Trust ETF strategist Ryan Issakainen. Eleven of the 13 tech funds that managed to stay in the green from Halloween to January are in the semiconductor or dividend-seeking categories. A spokeswoman for iShares, of which IGN tops the list, declined to comment for this article.

“Many tech funds focus on areas where profits are not currently where they will be,” says Issakainen. “Funds are tools. Some are designed to be more volatile than others.

Mr. Issakainen’s First Trust Nasdaq Technology Dividend Index (TDIV) fund is No. 3 on Morningstar’s list, returning 1% for the November-February period. The fund’s strategy of seeking out dividend-paying tech companies is conservative for Silicon Valley finance. Its top 10 holdings include International Business Machines,

IBM 0.55%

Broadcom,

AVGO 3.01%

Intel INTC 0.29%

and Oracle ORCL -2.25%

– none of which are darlings of the fast-growing set. Another First Trust fund, a mix of companies involved in building 5G wireless networks, ranks third in Morningstar’s overall technology category.

On the other hand, a range of stocks that have performed well over the past decade have been battered far worse than the tech-heavy Nasdaq Composite average. The same is true for funds that have benefited from the prior rise in equities.

Pretty much everything related to bitcoin has taken a beating. Several consumer-oriented actions FAANG (acronym for Meta Platforms FB -1.43%

“Facebook, Apple, Amazon.com,

AMZN -1.53%

NetflixNFLX -1.72%

and Alphabetit’s

GOOG -1.63%

Google) that led Nasdaq gains over the past decade have been, well, deflated, dragging fund returns with them. Netflix and Facebook fell more than double the QQQ fund, with Amazon.com also underperforming. Their woes hammered funds like O’Shares Global Internet Giants ETF (OGIG), down 30% from November to February. Even some cloud computing funds took a beating, with Global X’s $850 million Cloud Computing ETF (CLOU) down 32%.

Among funds, all sorts of recent darlings appear near the bottom of Morningstar’s list. Fintech funds take three of the bottom five spots on its list, including Global X Blockchain ETF (BKCH), which lost 44%. Half of its portfolio, as of February 15, was concentrated in five stocks. T. Rowe Price Global Technology Fund (PRGTX), which had grown 10x in a decade, fell 32%, hammered by losses from blockchain-linked online retailer Sea Ltd., Zoom Video Communications ZM -3.69%

and Shopify.

STORE -6.23%

Two funds from Ark Investment Management of Cathie Wood, once a top-flight manager, are also at the bottom of Morningstar’s list. Ms. Wood’s ARK Next Generation Internet (ARKW), with Amazon.com accounting for 24% of the portfolio, lost 42%, and ARK Fintech Innovation (ARKF), highlighted by crypto-friendly games like Square and PayPal,

PYPL -1.41%

lost 43%.

“I think our biggest concern is that our investors are turning what we think are temporary losses into permanent losses” by selling fund shares, Ms. Wood said in an interview with CNBC. Ms. Wood also said investors have actually been adding net assets to ARK’s funds since mid-January.

Little flexibility

The question is, what to do next?

Many funds, especially ETFs, have little leeway to reshuffle their holdings because they are committed to tracking indices – often very specialized indices that the fund companies themselves helped create. That means investors have to decide whether they want to stick with the funds they have and wait for fintech and FAANG rebounds, and adjacent tech innovation plays like electric vehicles, Khan says.

For actively traded funds that don’t track an index, investors considering exiting or buying more should be aware of which stocks are the portfolio managers’ “high conviction bets”, those who determine the composition of a fund’s allocation and performance. , significantly different from that of an index, says Todd Rosenbluth, fund strategist at CFRA Research.

“It all depends on your risk appetite,” says Issakainen. “If you can’t stand the volatility, it’s not a good place to sit.”

Mr. Mullaney is a writer in Maplewood, NJ. He can be contacted at [email protected]

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