Exploring the Potential of Tech Investing
Technology stocks have had impressive momentum. In the first 9 months of 2020, the S&P 500 Information Technology sector had a total return of 28.69%—far exceeding the S&P 500’s total return of 5.57%.
What should investors know about participating in this trending sector? This graphic from New York Life Investments covers tech’s long-term performance, the broad tech universe, and what investors should consider when analyzing tech investments.
Tech’s Performance
Since most tech companies are internet-based, COVID-19 has caused minimal disruptions to their business operations. In a number of cases, tech companies even saw sales growth as they benefited from consumers going online during lockdown.
Over a longer timeframe, however, tech’s performance is quite varied.
| S&P 500 Information Technology | S&P 500 | |
|---|---|---|
| 2010 | 10.19% | 15.06% |
| 2011 | 2.41% | 2.11% |
| 2012 | 14.82% | 16.00% |
| 2013 | 28.43% | 32.39% |
| 2014 | 20.12% | 13.69% |
| 2015 | 5.92% | 1.38% |
| 2016 | 13.85% | 11.96% |
| 2017 | 38.83% | 21.83% |
| 2018 | -0.29% | -4.38% |
| 2019 | 50.29% | 31.49% |
Data based on total returns.
Tech underperformed the general market in 2010, 2012, and 2013. However, the sector has outperformed every year thereafter.
In total, investors who held tech stocks over the last decade would have been rewarded. The 10-year annualized return for the S&P 500 Information Technology index was 20.50%, compared to 13.74% for the S&P 500.
The Tech Universe
While the information technology sector is commonly used to represent tech stocks, the broader tech universe can be broken down into 4 business types:
- Software – such as application software, fintech, and cybersecurity.
- Hardware – such as electronic equipment, semiconductors, and self-driving cars.
- Internet Information – such as social networks, e-commerce, and digital advertising.
- Telecommunication – such as internet services, telephone operators, and cable companies.
In addition, there are other companies that don’t fit neatly into these categories. This includes businesses involved in biotechnology, blockchain, or even retailers with modern technology such as mobile payment systems.
What Investors Should Consider
There are many factors to consider with tech investing.
- Diversification
To lower potential risk, investors can diversify across industries, geographies, and individual companies. Tech investing should also be part of a broader portfolio strategy. - Risks and opportunities
Tech stocks have unique risk factors, such as regulatory risk arising from data privacy and antitrust concerns. However, they also present specific opportunities: new applications of technology are always being discovered. For example, GPS was originally used by the U.S. Navy to track submarines, but is now used for things like ridesharing. - Personal objectives
Investors can consider whether they are seeking growth or income. Growth investors can look for newer companies with high growth potential. Income investors may seek mature companies, some of which offer dividends. - Company financials
It can be tempting to get swept up in the news hype of a particular company. Instead, investors can pay close attention to company financials and reporting to ground their interest in reality.
With all this in mind, how do the sector’s risks measure up against its returns?
Potential Risk/Reward Payoff
Tech stocks have historically been more volatile than defensive sectors, such as utilities and consumer staples. However, they have also generated higher returns relative to their risk level.
Annualized risk-adjusted returns
| 3-yr | 5-yr | 10-yr | |
|---|---|---|---|
| S&P 500 Information Technology | 1.37 | 1.49 | 1.28 |
| S&P 500 Consumer Staples | 0.65 | 0.78 | 1.06 |
| S&P 500 Utilities | 0.52 | 0.76 | 0.84 |
Risk is defined as standard deviation, calculated based on total returns using monthly values.
By understanding the landscape and what to look for, investors will be poised to take advantage of tech’s potential.