Investors are loving these tech funds – and they might provide some unexpected diversity

Investing in a tech fund may seem like the last thing that needs more space in your portfolio, considering the sectors’ dominance in the most popular global tracker funds.

Despite this, a group of tech-heavy funds have been bestsellers among AJ Bell DIY investors, with a renewed interest over the past three months. Namely, Polar Capital Global Technology, Polar Capital Technology Trust, L&G Global Technology Index trust and Blue Whale Growth fund.

Investors may assume that adding one of these funds to their portfolio would mean doubling down on many of the same big tech companies that are already highly represented in tracker funds, like Alphabet, Nvidia or Apple. But, by digging into the holdings of these popular funds, you may find more variety in companies as well as some less common names than anticipated.

More tech exposure certainly isn’t for everyone. Investors who choose to hold a global tracker fund are putting a lot of faith in the sector. The iShares MSCI World ETF, one of the top choices for investors, already has a 30% allocation to the sector. Financials, the next-largest sector, is just over half the size at 16%. The fund tracks the MSCI World index and the weightings of different companies are dependent on their market cap. Because these tech names have done so well in recent years, they’ve become a larger slice of that pie which fuels further growth.

For instance, in the iShares MSCI World ETF, Nvidia (with a 5.2% allocation), Apple (5%), Microsoft (3.8%) and Amazon (2.8%). Those investing in the US S&P 500 would find even higher concentration in the top names, with 7.8% allocated to Nvidia and 6.8% to Apple.

• Read: US ETFs head-to-head: Vanguard S&P 500 vs Invesco EQQQ NASDAQ-100

While concentration risks have been rung loudly in global equity markets for some time, the outperformance of this small set of companies has whetted investor’s appetite for even more tech exposure. For many investors, that boost has come from either dedicated tech funds, or funds with a tech-heavy weighting.

Layering any additional exposure onto a portion of the market you already have a bigger part of your portfolio in, such as tech, can add to this concentration risk phenomenon. Companies within the same sector tend to experience a high amount of correlation when it comes to rises and falls.

For example, US equity investors will have felt the impact of the various AI-related selloffs earlier this year as markets have a habit of grouping things together.

That being said, diversification to different companies within a sector will offer at least some level of difference in returns and give your assets a bit more variety in the case that one of the names that tend to be dominant in indices, like Apple, were to have a disappointing set of earnings.

L&G Global Technology Index trust

Those who have chosen to increase their tech exposure beyond what they access in a global fund have taken a large variety of approaches. The most popular among AJ Bell investors, and arguably the simplest, is the L&G Global Technology Index trust, a fund tracking the FTSE World Technology index. While this provides greater exposure to the tech sector, it doesn’t do much in the name of diversification. In fact, it holds nearly the same top five names as iShares MSCI World ETF, with the addition of TSMC.

Polar Capital Global Technology

But the second most popular name, Polar Capital Global Technology, takes an approach with a significant divergence from the index. While it has the same top holding of Nvidia, the list beyond this point brings up names that are much less prominent, or not included, in the iShares MSCI World ETF. The investment choices have provided the fund with the best return out of this highlighted group over five years. SanDisk, for example, has had a meteoric rise through the ranks in the past year, with a 3,092% share price gain in the year to 25 August.

The MSCI World index announced on 12 August it would be adding SanDisk, so with time, this allocation will increase. But the advantage the Polar Capital fund holds over index trackers is the ability to make their own decision and enjoy those gains earlier on.

Polar Capital Technology Trust

Despite having a very similar title to Polar Capital Global Technology, Polar Capital Technology trust is a different product with a different lead manager. It also operates as an investment trust instead of an open-ended fund, which means that it can be traded like a stock and can have a difference between the net asset value of the investments it holds and the share price.

It also can hold, as shown below, cash equivalents. So, if the fund is in between investments and has not yet decided what the best opportunity will be, it can hold that money in cash. You may notice that Nvidia is the common denominator across all these funds. Because the returns of the company have been so high across the past five years, it would be extremely difficult for funds to beat or even match the returns of the index without holding it in a prominent position. Of course, that also means that investors who hold a tech fund as well as a global or US focused fund will have a significant amount of their money in that single company.

Blue Whale Growth fund

The Blue Whale Growth fund is not a tech-exclusive fund, but it does have a weighting to the sector that is significantly higher than the MSCI World index. However, two of its top holdings, Flutter Entertainment and Vertiv Holdings, are not in the tech sector. This allows for additional diversity from the tech and AI theme. Some of its other tech exposures, such as Lam Research and SK Hynix, have a small or no presence in the iShares MSCI World ETF, which provides diversity on a stock basis.

But just because stocks aren’t exposed to a particular risk theme doesn’t mean they are free from risks of their own. Irish sports betting company Flutter Entertainment’s share price has fallen over 66% in the past year to 25 August after its focus on the competitive US market was scuppered by the rapid rise of prediction markets.

Gaining exposure to tech companies beyond the ones sitting at the top of global indices can afford investors a bit of diversity as well as more growth opportunities. But if the companies are exposed to the same themes, their share prices have a better chance of moving in the same direction even when they aren’t necessarily in sync.

While these three stocks, for example, reached their popularity at slightly different points, they all display a similar trend line. This has been generally positive for investors thus far, but were this trend to reverse, it creates the possibility that these companies could also feel similar pain points. The variety of stocks does provide some level of protection. Less-known names might have less dramatic rises and falls by not being traded by short-term investors, and they could start to sell off or gain at different points. But they are not likely to bring more diversity than looking to other sectors.