The tech funds with low volatility and top returns

Sam Benstead looks at the technology funds that have given investors a smoother ride – without compromising returns.

30th April 2024 10:45

by Sam Benstead from interactive investor

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The technology sector has been one of the best places to invest in over the past decade.

The rise of artificial intelligence (AI), cloud computing and social media have been among the drivers that have led to a 630% increase in the value of the Nasdaq 100 index, which can be viewed as a proxy for technology shares, over the past 10 years.

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But strong returns have come with lots of volatility. Take chipmaker Nvidia for example: shares lost nearly two-thirds of their value from November 2021 to October 2022, but since then they have risen nearly seven-fold.

Volatile shares mean that there has been lots of big price swings at an index level. The Nasdaq 100 has regularly dropped more than a third over this period, and gone through a number of bear-market drops of more than 20% over the past 20 years.

Given the volatility of tech investing, finding winning tech funds that have managed to steer portfolios through market swings is important. This helps investors determine the skill of a fund manager.

There are a number of tools that fund buyers have at their disposal to assess risk-adjusted returns. Here, we take a look at three key measures to watch: volatility, the Sharpe ratio, and max drawdown.

The least volatile funds

Starting with the lowest and highest volatility funds gives clues about where to invest in the tech sector depending on your risk profile.

For those looking for tech funds that will not swing too widely, data from FE Analytics over the past three years shows that the Investment Association (IA) Technology and Technology Innovation sector funds with the lowest volatility are: SPDR MSCI Europe Communication Services UCITS ETF, Fidelity Global Technology, Herald Worldwide Technology and Xtrackers MSCI World Communication Services UCITS ETF.

SPDR MSCI Europe Communication Services UCITS ETF is packed with telecoms companies, such as Orange, Telefonica and Deutsche Telekom. This part of the market generates relatively stable profits, so it makes sense that share prices are also relatively stable. Xtrackers MSCI World Communication Services UCITS ETF also has lots in telecoms shares, such as AT&T Inc (NYSE:T) and T-Mobile US Inc (NASDAQ:TMUS), which has made it less volatile than peers.

On the other hand, Fidelity Global Technology and Herald Worldwide Technology are actively managed funds that have successfully managed to pick technology shares with less volatility than peers. Currently they both have Microsoft, Alphabet, Apple and Amazon in the top 10 most-held shares. The largest technology shares have delivered steady growth for investors compared with smaller shares.

The highest volatility funds, according to FE Analytics over the past three years, were T Rowe Price Global Technology Equity, Liontrust Global Technology, WisdomTree Cloud Computing UCITS ETF, WisdomTree Cybersecurity ETF - USD Acc (LSE:WCBR) and GS Global Future Technology Leaders Equity Portfolio.

The least volatility relative to returns

The Sharpe ratio measures the volatility of a portfolio relative to how well it has performed. It is calculated by taking the excess return over the risk-free rate (3.5% currently, according to FE Analytics) for a fund, then dividing it by the standard deviation of a fund, which is a measure of volatility. A higher Sharpe ratio indicates the fund manager took less risk to generate strong returns. Therefore, delivering better risk-adjusted returns.

The measure is one that Fundsmith Equity manager Terry Smith often uses to highlight the power of his “quality” investment style.

FE Analytics shows that tracker funds had the best risk-adjusted returns over the past three years in the IA’s tech sector.

Top were iShares S&P 500 Information Technology Sector UCITS ETF, L&G Global Technology Index Trust and SSGA SPDR S&P U.S. Technology Select Sector UCITS ETF.

Respectively the funds are up 534%, 478% and 488% since shared data begins in late 2015.

This shows that technology tracker funds, which spread their bets across lots of tech shares, have been a good option for investors seeking lower volatility with higher returns.

The best risk-adjusted returns from active funds were Herald Worldwide Technology and Fidelity Global Technology. This shows that the two lowest-volatility actively managed tech funds also delivered strong returns for investors. Over the past decade, Fidelity Global Technology has returned 680% and Herald Worldwide Technology is up 500%.

The smallest peak-to-trough drops

Max drawdown measures the largest peak to trough drop – essentially what an “unlucky” investor would have lost if they bought and sold at the worst possible times.

Funds that suffer steep drawdowns may be less appealing to investors as they indicate a wild ride of periods of strong growth followed by difficult-to-stomach drops.

Over the past three years, Fidelity Global Technology and Herald Worldwide Technology also performed well by this measure, registering max drawdowns of 18.35% and 21.1%, according to FE Analytics.

Tracker funds again performed well here, with SSGA SPDR MSCI Europe Communication Services UCITS ETF showing the lowest max drawdown of 16.5%, followed by SSGA SPDR S&P U.S. Technology Select Sector UCITS ETF and iShares S&P 500 Information Technology Sector UCITS ETF (22.9%).

These compare very favourably with T Rowe Price Global Technology Equity, which had a max drawdown of nearly 60%, as well as two thematic technology exchange-traded funds (ETFs): WisdomTree Cloud Computing UCITS ETF Unhedged and WisdomTree Cybersecurity UCITS ETF, which had respective max drawdowns of 58.4% and 46.4%.

Thematic ETFs are often very volatile as their holdings are all very closely correlated due to their similar business models. They are prone to boom and bust cycles as themes come in and out of fashion with investors.

What does this tell us?

This analysis shows that tracker funds in the tech space offer lots of value to investors after a smoother ride, as do some actively managed funds.

In fact, some of the best-performing funds over the past decade have also been the least volatile, showing that chasing high returns may not be the best approach in the tech space.

Fidelity Global Technology and L&G Global Technology Index Trust are the two top-performing funds, and achieve this with lower volatility than rivals.

However, investors should be wary of how concentrated some tracker funds have become, with some having more than 15% of their portfolios in Apple, Microsoft and Nvidia. This means that if the top tech shares stumble, these tracker funds could see big losses and lots of volatility.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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