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September 25, 2020

Refinitiv Lipper Chart of the Week: Tech Sector Funds Fall out of Favor

by Pat Keon, CFA.

Funds in Refinitiv Lipper’s Science & Technology (tech sector) classification (including both mutual funds and ETFs) suffered net outflows of $1.3 billion for the fund-flows week ended Wednesday, September 23. This was the tech sector fund group’s fifth largest one-week net outflow in its history (Refinitiv Lipper began tracking fund flows data in 1992). As could be expected from this peer group, its performance (both from a fund flows and total return perspective) has mirrored that of the technology-heavy NASDAQ Composite Index.

Similar to the majority of fund asset groups, tech sector funds were hit hard when the impact of COVID-19 took hold near the end of the first quarter. The group closed Q1 with four straight weekly net outflows that reduced their coffers by $1.8 billion. The peer group’s performance followed suit as it retreated 11.1% in March, which was slightly worse than the NASDAQ Composite which finished the month down 10.1%. As the reality of the long-term negative impact the coronavirus would have on the U.S. economy became apparent, investors went looking for a safe-haven investment to ride out the pandemic and found tech stocks and, therefore, tech funds. Fund flows into tech funds bounced back with a vengeance as the group has posted three of its four best monthly results ever (see chart below) since the end of Q1. Net positive flows of this magnitude had not been experienced by the group since the first quarter of 2000, during the tech sector’s halcyon days before the dot-com bubble burst. The sector’s performance spiked as well, with the NASDAQ Composite appreciating 56.6% from the end of Q1 to hit its high-water mark of 12,056.44 on September 2. The net positive fund flows during this time frame were led by passively managed funds. The Vanguard Information Technology Index Fund (+$3.3 billion) paced the net inflows, with ARK Innovation ETF (ARKK, +$3.1 billion), First Trust Cloud Computing ETF (SKYY, +$1.6 billion), and ARK Next Generation Internet ETF (ARKW, +$1.1 billion) rounding out the top individual net inflows.

But all things must pass and by early September there were whispers on the street about the ultra-high valuations of tech stocks. This run-up in valuation led to talk of a second dot-com bubble and investors did an about face. After its record-setting net inflows since the end of Q1, tech sector funds have now suffered net negative flows in three of the last five weeks and their performance has trended down as well, retreating 6.6% over the same time frame. Since its recent high on September 2, the NASDAQ Composite has now entered correction territory, losing 11.5% of its value in the 15 trading sessions since then. The lion’s share of the net outflows for this peer group in September has come from ETF products, as they are responsible for $1.3 billion of the group’s $1.6 billion total net negative flows. The net outflows for the month to date among tech sector ETFs have been dominated by Technology Select Sector SPDR (XLK), which has had $1.2 billion net leave.



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