Tech Giveth; Tech Taketh Away

The S&P 500® Information Technology Index (“Tech”) has been on a significant bull run for quite some time now, especially since the beginning of 2017. It has outpaced the other S&P 500® sectors by a wide margin. It also has the largest weight within the S&P 500® Index, significantly contributing to the S&P 500®’s overall performance.

sp500 allocation 12-31-17

Source: S&P Dow Jones Indices. https://us.spindices.com/indices/equity/sp-500. Data as of 12/31/17.

To illustrate the impact, we’ve prepared a data table showing the cumulative performance of the S&P 500® sectors thru 3/12/2018 – the most recent high of the Tech sector.

S&P 500® Sector Returns for the Period 1/1/2017-3/12/2018
Information Technology Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Materials Real Estate Telecom Utilities
Cumulative Return 55.30% 32.97% 8.55% -6.18% 29.56% 27.40% 23.86% 25.29% 4.78% -5.24% 5.63%
Compared to Tech Sector 0.00% -22.33% -46.75% -61.48% -25.73% -27.90% -31.44% -30.01% -50.51% -60.53% -49.67%

Source: S&P 500® Sector Indices, FactSet. Data for period 1/1/2017-3/12/2018.

The average difference of each sector compared to Tech is a staggering -36.94%. This outperformance coupled with the large weight of the Tech sector helped propel the overall S&P 500® Index to a period return of 27.31%. Having a high concentration in tech paid off big time.

The past couple of weeks has been a different story and illustrates how quickly things can change. Since the S&P Information Technology sector’s top on 3/12/2018, we’ve see a dramatic shift in leadership among the sectors.

S&P 500® Sector Returns for the Period 3/13/2018-4/5/2018
Information Technology Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Materials Real Estate Telecom Utilities
Cumulative Return -7.20% -3.18% -2.20% 1.07% -5.59% -4.63% -3.12% -4.93% 0.82% -2.33% 3.24%
Compared to Tech Sector 0.00% 4.01% 5.00% 8.27% 1.61% 2.57% 4.08% 2.26% 8.01% 4.87% 10.43%

Source: S&P 500® Sector Indices, FactSet. Data for period 3/13/2018-4/5/2018.

This time the other sectors outperformed Tech by an average of 4.65% during the period – a sizable reversal in such a short period of time. Tech has gone from leader to loser, down -7.20% through 4/5/2018. Some of the more defensive sectors like Utilities, Energy, and Real Estate, were flat or even positive. These sectors have very small weights in the overall index coming in at 2.93%, 6.07%, and 2.89%, respectively. Their impact on the overall index pales in comparison to the effect of Tech. Accordingly, the S&P 500® index was down -4.21% for the period.

This highlights a major pitfall of large, broad-based indexes that are highly dependent on a limited number of sectors. When sectors of large concentrations are moving higher it’s great, and very helpful to overall performance of a portfolio. However, when those sectors fall, it can be extremely painful.

Therefore, when managing our portfolios, we break down major indices into their granular parts wherever possible. It allows us to have more control over our allocations and enables us to avoid concentration risk while still taking advantage of risk changes in each of the sub-parts – regardless of their weight in an overall index.

We believe it makes for more effective risk management and helps to avoid getting caught up in sustained market turmoil. This process of staying unbiased and allocating based on risk can help to lower the overall volatility of an investment portfolio resulting in a smoother and more tolerable long-term investment experience.


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About the author: Douglas Hedley

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