With the stock market falling roughly 5% in the past few weeks, a lot of investors are getting nervous. A raft of disappointing economic data has added to concerns that the economy may be stalling out.
But given how far and how fast the market has rebounded in the past two years, a bit of a correction shouldn't be a surprise. And while I do think we're in for a few rough months of subpar growth, investors would do well to look at the stock market pullback as an opportunity. Stocks you may have had your eye on could be now trading at a discount -- especially in one corner of the market that now boasts some increasingly attractive players.
Down in the dumps
Information technology never really regained its luster after its high-flying days of the late 1990s. In the 2000-2002 bear market, it was the lowest-performing sector all three years, and it has ranked near the bottom of sector performers every year since, with the exception of 2003 and 2009 when it briefly popped up to the No. 1 spot, and 2007, when it ranked fourth. While the S&P 500 Index has posted an annualized 1.5% gain since June 2000, the iShares Dow Jones US Technology ETF (NYSE: IYW ) has lost 4.4% a year in that time.
And while no sector of the market has been completely spared in the past few weeks, tech has fallen farther than the broader market. In the past three months, while the S&P 500 is down 2.2%, the iShares Dow Jones US Technology ETF has fallen 5.6%.
But there's an upside here. These declines mean that many technology stocks are now trading at their lowest valuations in more than a decade. In fact, according to Bloomberg, price-to-earnings ratios for computer stocks are the lowest they've been since 1998. Likewise, computer industry earnings are about double what they were at the peak of the Internet bubble. And with one analyst projecting that corporate spending on computer equipment and software will increase by about 10% this year, the outlook is bright for the sector. More and more money managers are picking up cheap tech names with strong long-term prospects, so Main Street investors may want to take a page from their playbook.
Tech from the best
One of the best ways to get exposure to the tech market while still maintaining a diversified portfolio is to invest in broad-based mutual funds that lean heavily into this sector. One of my favorites here is Fidelity Contrafund (FCNTX). At last glance, manager Will Danoff devoted one-third of fund assets to the tech sector. Danoff looks for fast-growing tech market leaders like Apple (Nasdaq: AAPL ) , Google (Nasdaq: GOOG ) , and Oracle (Nasdaq: ORCL ) to shine going forward. Although Contrafund has nearly $80 billion in assets, it still looks and performs differently from the S&P 500, so you're not getting an index in disguise here. In fact, the fund outranks 95% of all large-cap growth funds over the past 15 years. If you're looking for a first-rate growth fund with a hefty allocation to information technology, Contrafund is one of your best bets.
But even if you're a more conservative investor, you can still get in on the incredible growing power that tech has to offer. If you want to invest in tech while still keeping a lid on risk, a fund like Vanguard Morgan Growth (VMRGX) could be right up your alley. This fund is sub-advised by five different managers, including Wellington Management, which runs approximately 40% of the portfolio. While the fund's profile tends to be a bit more buttoned-up than most growth funds, tech still plays a big role here -- to the tune of roughly 37% of assets. Here, low-P/E, dividend-paying blue-chips like IBM (NYSE: IBM ) and Microsoft (Nasdaq: MSFT ) sit alongside more growth-oriented options like Apple and Google. This fund won't dazzle, and it will lag its racier counterparts when growth is in favor, but it is a solid choice for more moderate-minded investors.
Small steps to big gains
And while I generally advise against investing in mutual funds or exchange-traded funds that focus on a single sector of the market, if investors really want to give their tech allocation a boost, there are a handful of tech-oriented exchange-traded funds that might work. One of the best is the Technology Select Sector SPDR (NYSE: XLK ) , which comes with a low 0.20% price tag. Just remember to keep your allocation to sector funds like this very low -- no more than 5% of your portfolio. Going larger than that adds unnecessary risk.
The future of the market may be especially unclear right now, but one thing is certain -- many tech names are now screaming bargains. So whether you are a stock picker, a fund fan, or an ETF fanatic, make sure you've got some technology power at work in your portfolio.
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