According to data from Morningstar, the technology sector has clearly emerged as the best performer so far this year among all the key mutual fund categories. Following optimism over the Trump-led rally, the sector continued to maintain its impressive performance during the first quarter of 2017.
Although Trump’s proposed trade and immigration policies are expected to weigh on big technology companies, his corporate tax repatriation plans could benefit technology companies that hold a lot of cash overseas. These tech companies could repatriate these reserves and use it for investments, dividends and buybacks. In this context, investing in mutual funds from the technology sector continues to be a prudent investment choice.
Technology Sector’s Performance in Q1
The Technology Select Sector SPDR ETF (XLK) was the biggest gainer among S&P 500 sectors, gaining 10.2% in the first quarter. During the same period, the broader S&P 500 and Nasdaq gained 5.5% and 9.8%, respectively. Moreover, the tech-based Nasdaq reported its best quarterly gain since the fourth quarter of 2013. The S&P 500 also posted six consecutive quarterly increases and registered its strongest first-quarter performance since 2013.
Additionally, technology mutual funds have increased 15.6% so far this year, notching the best gains among the major sector equity fund categories. Technology mutual funds have also gained 8.7% in the last three months.
Factors Contributing to Tech Gains
A strengthening economy and better job prospects provided a significant boost to economically sensitive growth sectors like technology that typically perform well in a maturing economic cycle. Moreover, President Donald Trump’s tax cut policies are expected to have a positive impact on the bottom line of multiple tech behemoths.
Additionally, favorable cash reserves of most of the tech companies put them in a position to increase payouts to their shareholders, which in turn also played an important role in boosting demand of these securities. Significant cash reserves also provide a shield for these companies. These cash reserves ensure that these companies are not plagued by financial troubles even in a rising interest rate environment, chances of which are high in coming months.
Microsoft & Alphabet Post Strong Earnings
Recently, two big tech companies like Microsoft MSFT and Alphabet GOOGL posted solid earnings results. Microsoft’s earnings per share (EPS) and revenues of $0.73 and $23.557 billion for fiscal third quarter beat the respective Zacks Consensus Estimates of $0.69 and $23.551 billion. Also, Alphabet reported fiscal first quarter EPS of $7.73, which surpassed the Zacks Consensus Estimate of $7.48. Its revenues also beat the Zacks Consensus Estimate.
The technology sector’s Q1 results and management’s commentary for the current and coming quarters support impressive stock market performance this year (the Zacks Tech sector is up +11.2% year-to-date versus +6.8% gain for the S&P 500 and +3.7% for the Russell 2000). The Technology sector is expected to come out with double-digit earnings growth. This has also raised investors’ optimism about the space.
5 Best Performing Technology Funds in Q1
Against this backdrop, it will be interesting to find out which mutual funds from the space emerged as the standout performers in the first quarter of 2017.
We have highlighted five technology mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy). We also expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
These funds also come with low expense ratios and with no sales load. Moreover, they have encouraging first quarter returns, and the minimum initial investment is within $5000.
Fidelity Select Technology FSPTX seeks growth of capital. FSPTX invests a large chunk of its assets in common stocks of companies primarily involved in production, development and sale of products used for technological advancement. FSPTX invests in both U.S. and non-U.S. companies.
FSPTX’s returned 17.4% in the first quarter. Annual expense ratio of 0.76% is lower than the category average of 1.46%.
VALIC Company I Science & Technology VCSTX invests a majority of its assets in common stocks of companies that are poised to gain from the development, advancement, and use of technology. It invests a maximum of half of its assets in foreign securities.It also invests a maximum of 20% of its assets in companies from the emerging economies.
VCSTX’s returned 5.4% in the first quarter. Annual expense ratio of 0.99% is lower than the category average of 1.46%.
T Rowe Price Global Technology PRGTX invests a bulk of its assets throughout the world in the common stocks of companies that derive their revenues from the development, advancement, and use of technology. PRGTX invests in a minimum of 5 countries and a minimum 25% of its assets are invested in foreign companies.
PRGTX’s returned 17.6% in the first quarter. Annual expense ratio of 0.90% is lower than the category average of 1.46%.
Columbia Global Technology Growth Z CMTFX invests a lion’s share of its assets in equity securities of companies, which are expected to generate revenues mainly from development and use of technology. CMTFX seeks appreciation of capital for the long run.
CMTFX’s returned 14.3% in the first quarter. Annual expense ratio of 1.11% is lower than the category average of 1.46%.
Fidelity Select Computers FDCPX invests heavily in equity securities of companies involved in research, development, and distribution of products or services with relation to the current hardware technology in the computer industry. The fund invests both in U.S. and non-U.S. companies.
FDCPX’s returned 12.9% in the first quarter. Annual expense ratio of 0.81% is lower than the category average of 1.46%.
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