- Since January 2023, technology funds have experienced an extraordinary surge, with the sector averaging an impressive growth of 61%. But has this sharp rise leave tech funds overvalued and potentially prompt another sell off similar to 2022?
- Since July 2024, technology funds have averaged negative growth of -2.44%
- Out of the 33 Technology funds analysed, only 7 managed to outperform their sector peers, earning a top 4 or 5-star rating.
- 20 of the 33 funds analysed received a poor 1 or 2-star rating.
- The iShares S&P 500 Information Technology Sector UCITS ETF fund has been the top performing fund over the past 1, 3 & 5 years in the IA Technology and Technology Innovation sector.
Between November 2021 and December 2022 the technology sector experienced a drop in value of 31%, prompting many investors to ditch the sector in favour of less volatile markets.
However, since January 2023, technology funds have experienced an huge surge in growth, with the sector averaging impressive returns of 61%. This strong performance has made the tech sector one of the highest growth markets for investors, significantly outperforming most other core sectors during the period.
But some analysts are now warning that technology funds may have grown to become overvalued, which could lead to yet another market correction and decline in the value of technology focused funds.
In this article, we will explore whether the tech boom is sustainable or if a sharp decline might be on the horizon. We’ll also highlight the 5 best performing technology funds that have excelled over the past 1, 3 and 5 years.
Technology Funds Performance Summary
We analysed all 33 technology funds within the IA Technology and Technology Innovation sector to assess their performance and sector ranking over the past 1, 3 & 5 year periods.
Among the funds analysed, only 7 achieved top-tier ratings of 4 or 5 stars. These top performing funds have demonstrated consistent strength and reliability outperforming the majority of their sector peers over the various time frames.
Conversely, a proportion of the funds underperformed, with 60.8% receiving a poor 1 or 2 star performance rating. 12 funds were assigned a 1-star rating, while 8 funds received 2 stars, indicating subpar performance relative to their sector peers.
This highlights the performance disparity within the sector and underscores the critical importance of fund selection for sustainable long-term investment success.
A Strong Period of Performance For Tech Funds
Since the start of 2023, technology funds have experienced a significant surge, driven by strong investor optimism and broader market recovery. As can be seen in the chart below, the IA Technology and Technology Innovation sector has averaged growth of 62.13% from January 2023 to mid October 2024. This performance dwarfs other core sectors, many of which saw significantly lower returns during the same period.
However, as we identify below, there are concerns that the strong upward performance trend for Technology funds could reverse and mirror that of the 2021 downturn.
The 2021 Tech Sector Downturn
The technology sector faced a sharp downturn in 2021, primarily driven by a combination of macroeconomic pressures and market sentiment shifts. Rising inflation and the corresponding increase in interest rates led to a revaluation of growth stocks, particularly in the technology space, which had thrived on the low-rate environment. Higher rates reduce the future value of tech companies’ projected earnings, hurting their stock prices. In addition, supply chain disruptions, particularly in semiconductor production, contributed to the struggles faced by the sector. These disruptions caused delays in production for key tech products, directly impacting many companies.
During this period, the IA Technology and Technology Innovation sector declined by 31%, marking one of the sector's steepest falls in recent history. The sharp correction was exacerbated by a market-wide "panic sell-off" as investors moved their capital away from high-growth technology stocks toward safer, more stable sectors. The once-booming valuations of major tech companies were reset, reflecting a more cautious outlook. Funds heavily exposed to tech stocks, which had previously outperformed the broader market, saw steep declines, with even the most prominent funds suffering significant losses.
This downturn underscored the risks inherent in the tech sector, especially when valuations become stretched in the face of shifting economic conditions.
Is Another Downturn Looming for Technology Funds?
After the initial Covid 19 outbreak in February 2020, technology funds dropped in value by 23.4% . The subsequent recovery was very strong and between March 2020 and November 2021 the sector averaged exceptional growth of 107.5%. At this point the sector experienced a sharp downturn averaging a drop of 31.4% over the following 13 months.
The strong growth in technology funds since January 2023, with a sector-wide surge of 61%, has drawn parallels to the pre-2021 market conditions. The current rally is fuelled by a broader economic recovery, the continued expansion of artificial intelligence (AI), and renewed investor enthusiasm for tech-driven innovation. However, these sharp gains raise concerns that the sector may once again be on the brink of overvaluation.
Several factors suggest that technology funds could face a similar downturn to that of 2021. One key risk is rising interest rates, which, as in 2021, could compress the lofty valuations of tech companies reliant on future growth potential. If central banks maintain or increase interest rates to combat inflation, the cost of capital for these companies could rise, eroding profit margins and reducing their appeal to investors.
Furthermore, the rapid gains since 2023 have left some analysts warning of an "overheated" sector, where stock prices may have detached from the fundamentals of underlying companies. With valuations approaching levels seen before the last market correction, the potential for another sharp sell-off looms large. Market volatility, driven by changing economic conditions or external shocks, could prompt investors to lock in gains and trigger a decline in fund values.
Investors need to remain cautious and evaluate whether the current valuations justify the risk, particularly given the cyclical nature of the tech sector and its vulnerability to economic shifts. While the long-term growth prospects remain strong, short-term volatility is a significant risk, especially after such a dramatic recovery.
A Volatile Few Months For Technology Funds
The past few months have been the most volatile for technology funds since their recovery at the beginning of 2023, which has added to concerns of a potential downturn.
Since July 2024, the Technology & Technology Innovations sector has experienced its longest period of negative performance since the 2021 downturn. During this period the sector has averaged -2.44%. This period of negative performance has only reinforced the belief of some analysts that the sector maybe approaching a bigger downturn.
Top 5 Technology Funds That Have Excelled
Despite the threat of a downturn, the sector is home to several high quality funds that over the past 5 years have consistently delivered strong performance.
Below we feature 5 of the best performing technology funds and provide a detailed overview of their performance over the most recent 1, 3, and 5-year periods.
These funds have consistently been among the top performers within the IA Technology & Technology Innovation sector, which has earned them a top 4 or 5 star rating. Their impressive track records highlight their ability to deliver strong returns in both the short and long term.
iShares S&P 500 Information Technology Sector UCITS ETF
The iShares S&P 500 Information Technology Sector UCITS ETF is an index fund designed to track the S&P 500 Capped 35/20 Information Technology Index. Its objective is to provide investors with returns through a blend of capital growth and income generation by investing in leading U.S. technology companies. The fund’s key holdings include industry giants such as Apple, Microsoft, NVIDIA, and Broadcom, which dominate the global technology sector.
This ETF has consistently been a top performer within the IA Technology & Technology Innovation sector, managing £7.79 billion in assets.
Over the past year, it achieved growth of 40.19%, and over 3 years, it delivered an impressive 69.14%, significantly exceeding the sector average of 26.16% and 12.71%, respectively. Its five-year growth of 198.93% has been particularly impressive at almost double the sector average of 96.26%. This consistent outperformance underscores the fund's effective strategy in capitalising on the growth potential of major technology firms.
Janus Henderson Global Technology Leaders
The Janus Henderson Global Technology Leaders Fund is a fund that aims to deliver long term capital growth by investing in a globally diversified portfolio of technology-related companies. It seeks to outperform the MSCI ACWI Information Technology and Communication Services Index over a 5 years.
With over £1.4 billion in assets under management, the fund invests in companies that generate substantial profits from technology. Its portfolio includes companies from various regions, including the United States, Emerging Markets, Asia, and Europe.
The fund has consistently outperformed the sector average. Over the last year, it achieved growth of 38.24%, significantly higher than the sector average of 26.16% and ranked 2nd out of 33 funds in the sector. Over the 3 years, the fund returned 33.25%, and over 5 years, it delivered an impressive 120.56%, far exceeding sector averages of 12.71% and 96.22%, respectively. This highlights its consistent ability to capture growth and deliver substantial returns.
The fund is actively managed and fund managers focus on investing in companies with competitive advantages and high barriers to entry, particularly those set to benefit from long-term technological trends. Its geographical diversification provides exposure to high-growth regions, which helps balance risk.
L&G Global Technology Index Trust
Launched in 2000, the L&G Global Technology Index Trust I Acc fund currently manages £3.26 billion in assets. Its main objective is to track the performance of the FTSE World Technology Index, which comprises over 400 leading technology companies across various sub-sectors including software, semiconductor equipment, and IT services. Prominent companies within the index are Apple, Microsoft, NVIDIA, and Meta Platforms.
The fund has demonstrated impressive performance, delivering returns of 37.91% over the past year and 49.04% over three years. Over the past 5 years it achieved very strong growth of 173.78%, which ranked 2nd out of all 33 funds in the IA Technology & Technology Innovation sector.
SSGA SPDR MSCI World Technology UCITS ETF
With £626.11 million in assets under management, the SSGA SPDR MSCI World Technology UCITS ETF consistently ranks among the top-performing funds in the IA Technology & Technology Innovation sector. This 5-star rated fund has delivered robust returns of 37.56%, 50.12%, and 165.18% over the past 1, 3 and 5 years respectively. These figures significantly outperform the sector averages for each period.
The investment objective of the fund is to track the performance of companies within the Technology sector across developed markets globally. The ETF uses a physical replication strategy, meaning it directly holds the underlying stocks in the index rather than using derivatives. This approach allows for accurate tracking of the index's performance while minimising tracking errors.
With a total expense ratio (TER) of 0.30%, this ETF has to date delivered a cost-efficient outcome for investors and it continues to provide quality exposure to the global technology sector.
Xtrackers MSCI World Information Technology UCITS ETF
The Xtrackers MSCI World Information Technology UCITS ETF 1C, launched in 2016, manages £3.53 billion in assets. The fund's primary objective is to mirror the performance of the MSCI World Information Technology 20/35 Index, which is designed to reflect the performance of large and mid-cap technology companies from developed markets globally.
Over the past year, the fund has generated a return of 37.44%, outperforming the sector’s average of 26.16%. Similarly, over three years, it posted a 50.12% return, far exceeding the sector’s 12.71% average. In the five years, the fund achieved an impressive 165.89%, significantly surpassing the 96.22% sector benchmark. This outperformance places it among the top performers in its category.
A major contributor to this strong performance is the fund’s full replication approach, whereby it holds the same stocks as the index it tracks. This strategy, combined with a low expense ratio of 0.25%, makes the ETF a cost-effective choice for investors.
With nearly 89% of its holdings in U.S. companies, the ETF benefits from the tech innovation hub in the U.S., which is home to some of the world’s most valuable and innovative tech firms. These factors, along with effective management, have enabled the fund to consistently deliver strong returns across various time frames.
Summary
Technology stocks have been one of the largest contributors to growth for investors but with high growth comes high volatility and the risk of sharp valuation drops when markets fall.
Despite these risks, technology remains a crucial driver for growth-oriented investors. While concerns about overvaluation and potential market corrections are legitimate, the sector has consistently delivered strong long-term returns. Historically, even after significant declines, the tech industry has proven its resilience and ability to rebound.
As one of the fastest-growing sectors, technology is instrumental in disrupting traditional industries by offering transformative products and services. For growth focused investors, incorporating technology funds as part of a diversified portfolio is essential as the growth potential net of all market corrections will likely reward investors with a long term outlook. One of the biggest risks for investors is over-reliance on the sector as no one sector has a monopoly on performance. Therefore diversification remains crucial to the success of a long term investment strategy.
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Despite concerns of a potential downturn for tech funds it will likely have little impact on a long term investment plan. However, for investors who are planning on drawing down of their investments they may want to speak to an investment expert to optimise their strategy.
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Balancing tech investments within a diversified portfolio can help maximise returns and mitigate the risks.
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