Tech shares still seem to have some stigma. Now there’s ‘proof’ tech shares are inferior. A recent article by ETF.com argues that tech shares underperform the broader market from a long term perspective. The site found that over the past 16 years, the technology sector shows a significant underperformance. This statement doesn’t come as a surprise, since the starting point was in the midst of the dotcom boom. During that period a couple of ETFs were started to benefit from the demand for technology stocks, such as the highly popular ETFs PowerShares QQQ Trust (QQQ) which tracks the Nasdaq-100 Index, and the Technology Select Sector SPDR Fund (XLK). Compared to the SPDR S&P 500 ETF (SPY) since that period, ETF.com notes a dismal performance for the techies, with XLK returning only 44.2% compared to 109% by SPY!
But as with many performance checks, the investigated period may return a flawed picture. So let’s run a couple of other checks to verify the performance of tech stocks vs the broader market. Why not take the point at the Grand Reset and start from the post dotcom-bubble low which was reached at October 9 in 2002?
Both tech-ETFs show a outperformance compared to the broader market as represented by SPY. And not just a little, QQQ achieved a yield almost 275% higher. That’s 21% a year! Also XLK beat SPY, though ‘only’ by a little more than 100%, or 8% a year. But this picture may be flawed as well, since tech stocks were battered most and being significantly oversold, there was a lot more potential ground to catch up. As researchers we’re ‘lucky’, since our millennium offered us another Grand Reset following the Financial crisis of 2008-2009. March 9, 2009 was the absolute low during this period for many shares, as well for SPY. Actually tech shares recorded a low on November 20, but March 9 proved a sort of double bottom for this category.
Same picture: a significant outperformance of tech stocks. The QQQ offered a return more than 100% higher above that of SPY. That’s still a more than decent 15% additional annual yield. Some might refer to extraordinary development of Apple, which could have caused tech indices to outperform. Interestingly, shares of Apple have a smaller representation in QQQ compared to XLK (currently 12.9% and 16.1% of total fund holdings). Apple is also the largest holding in the SPY-portfolio, although with a 3.8% representation this is significantly smaller.
The article also highlights the combination of technology and dividend. This is however not (yet) a happy marriage, since the leading ETF in this field, First Trust NASDAQ Technology Dividend ETF (TDIV) is a clear underperformer since its inception. Unfortunately, it’s listed since August 2012 therefore a proper long term comparison is not (yet) possible.
There is one other important issue we should address. Tech shares are said to be more cyclical and volatile, which would imply a higher risk attached to technology ETFs. So we could argue that during a bear market, tech indices will show a significant underperformance. Let’s look at how the ETFs performed during the bear market of 2007-2009. A high was reached on October 12, 2007 (SPY).
Another myth dismantled… Although the performance during the bear market was pretty close, SPY is still underperforming tech stocks. Therefore, in bull or bear markets, tech shares seem to outperform the broader market.