This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Why It Doesn't Pay to Buy Tech's Big Boys

This column was originally published on RealMoney on Sept. 20 at 2:11 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

It could be argued that it makes no sense to take on single-stock risk if the stock in question can't beat its sector index. A case in point would be the technology sector.

In the last three years, investors have not been rewarded for the extra risk taken by owning individual large-cap tech stocks, particularly the largest.

The chart below compares the biggest Nasdaq tech stocks, along with IBM (IBM - Get Report), to the iShares Dow Jones U.S. Technology Sector Index Fund (IYW).

All of the stocks charted are what are referred to as mega-cap stocks -- companies greater than $100 billion in market cap (Dell used to be at $100 billion, but it's now back down to $82 billion). There are 18 companies in the S&P 500 with a cap greater than $100 billion. Of them, 13 have lagged their respective sectors over the last three years. None of the five that beat their sector was a tech stock.



All parts of the market have their day in the sun; for mega-caps, that day was during the late 1990s. Since then, small-cap has outperformed large-cap.

There is some market history behind this idea: large-cap typically outperforms as a bull market matures. Admittedly, the last few years have been unusual as small-cap has led, yet we still may have a bear market sooner, rather than later, as the current cyclical bull is long by historical standards.

At some point in the future, mega-caps will provide leadership and it will make sense for the average cap size of a diversified portfolio to be larger than the average of the S&P 500, which is $90 billion. So at some point taking single-stock risk in this part of the market will be rewarded, but I do not see any immediate visibility for this now.

If this line of thinking makes sense to you, one of the tech sector ETFs would make a good proxy for the group. Again, the idea here is that if stock selection in the bigger caps will likely result in returns that only match the sector, the potential reward does not justify the risk taken.



The Big Names in Tech vs. the Sector
Over the past three years, Microsoft, Intel, Cisco and Dell have trailed their sector, as represented here by ETF IYW.
Source: BigCharts.com




This strategy lends itself well to areas of the market that don't usually pay high dividends, like technology or small-caps. If a stock provides sector-matching price appreciation with triple the dividend of a sector fund, owning the stock may make more sense. Most tech stocks have very little or no dividends, so the focus becomes mostly about expected price appreciation in a stock vs. the rest of the sector.

In blending together the tech portion of a portfolio, it makes sense to have exposure to different cap sizes and different parts of the sector. For example, eBay (EBAY) would not necessarily correlate that closely to F5 Networks (FFIV), but they are both tech stocks.



F5 Networks and eBay
Source: BigCharts.com

Neither correlates highly with IYW. If the technology portion of a portfolio was 70% IYW (or any other broad-tech ETF), 15% EBAY and 15% FFIV, diversity would be captured within the sector. Furthermore, there would be the chance for outsized gains from two different stocks that depend on completely different types of demand. eBay and FFIV are just examples; there are plenty of other tech names that give a chance of beating the sector.

Seventy percent of the sector in one broad ETF might seem high, but how many people do you think own Cisco Systems (CSCO - Get Report), Microsoft (MSFT - Get Report) and Intel (INTC - Get Report) as 70% of their tech holdings?

There are six broad-based tech ETFs: the aforementioned iShares Dow Jones U.S. Technology, iShares Goldman Sachs Technology Index (IGM), iShares S&P Global Technology Sector Index Fund (IXN), streetTRACKS Morgan Stanley Technology Index Fund (MTK), Technology Select Sector SPDR Fund (XLK), Vanguard Information Technology VIPERs (VGT).



Tech ETFs
Source: BigCharts.com

While all of them have a reasonable correlation to each other, MTK has been a clear outperformer, thanks to its heavy weight in Google (GOOG) and, to a lesser extent, Texas Instruments (TXN) and Broadcom (BRCM).

The idea here is that single-stock risk is taken out of the portfolio in the area that may not give an opportunity to outperform, but single-stock risk is left in names that might.

Blending different products together can be a great way to build a portfolio.



P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to TheStreet.com RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

At the time of publication, Nusbaum was long iShares Dow US Tech, Dell and Google in client accounts, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
CSCO $27.13 0.00%
IBM $160.40 0.00%
IGM $102.98 0.00%
INTC $32.00 0.00%
IYW $104.66 0.00%

Markets

DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs