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Here's One Way to Rebound From a Market Correction

By Nicholas Rossolillo - Mar 30, 2018 at 8:02PM

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Market drama continues; you might feel less angst if you were invested this way.

February and March have been a reminder for many that the stock market goes in more than one direction. After a two-year run with barely a hiccup, the S&P 500 Index "corrected," a period when the index drops by at least 10%. Here's how that looked as measured by the SPDR S&P 500 ETF, which tracks the 500 stocks in the S&P 500 Index.

SPY Chart

Data by YCharts.

The roller coaster has been tough for many investors, but for those invested in the leading edge of the economy, the emotional ride has been a little easier to handle.

A way to beat the market

Investing in fast-growing businesses can be a winning strategy, and there's no better place to start than the technology industry. Technology has become the fastest-growing segment of the economy, and according to the U.S. Bureau of Labor Statistics, about a quarter of economic output and 5% of the American workforce now comes from tech.

Stock charts displayed on a computer screen

Image source: Getty Images.

That strong growth has equated to market outperformance. This has been on display in grand fashion during the last two months. While technology stocks fell with the overall market -- illustrated here with the Vanguard Information Technology ETF (VGT 0.30%) and iShares PHLX Semiconductor ETF (SOXX -3.54%) -- they rebounded much quicker and are still touting gains for the year, while the S&P 500 is struggling to make up lost ground. Exchange-traded funds (ETFs) contain shares of many stocks and allow investors to easily get a range of holdings in one security. 

VGT Chart

Data by YCharts.

Why the market-beating returns? Technology has become more than a small niche in the U.S. economy. It has invaded every other industry -- from manufacturing to healthcare to finance -- and is an integral part of everyday life. As a result, sales and profitability have been growing above average. That faster growth than the average company means those stocks grow faster. 

Picking individual winners in tech can be tricky and risky, but you can still take advantage of growth in the industry through an exchange-traded fund (ETF) like the ones mentioned. Vanguard's Information Technology fund is well-diversified across the whole IT industry with over 350 stocks, while the iShares PHLX Semiconductor ETF focuses more specifically on semiconductors and consists of 30 stocks.

Metric

Vanguard Information Technology ETF 

iShares PHLX Semiconductor ETF 

Fund net assets

$20.9 billion

$1.7 billion

Number of stocks

358

30

Annual management fee

0.10%

0.48%

Dividend yield

0.92%

0.83%

Data sources: Vanguard and iShares.

A word of caution

Investing in high-growth companies is not for everyone. They can often be volatile and drop more than the overall market at times. That has been the case especially with semiconductor stocks, which can undergo cycles of growth and contraction because of changes in demand.

VGT Chart

Data by YCharts.

However, over the long term, tech is beating the broader S&P 500. That underscores the importance of technology needing to be at the core of every investor's portfolio. It has become the driving force in the U.S. economy and is leading to changes across businesses of all types. All signs point to that trend continuing for many years, and that could equate to growth that helps your portfolio rebound better from stock market turbulence.

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Stocks Mentioned

Vanguard World Fund - Vanguard Information Technology ETF Stock Quote
Vanguard World Fund - Vanguard Information Technology ETF
VGT
$327.53 (0.30%) $0.98
iShares Trust - iShares PHLX Semiconductor ETF Stock Quote
iShares Trust - iShares PHLX Semiconductor ETF
SOXX
$337.24 (-3.54%) $-12.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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