Among the broader mutual fund categories, the technology segment clearly emerged as the best performer in the third quarter, according to Morningstar. The strong gains in the sector came at a time when the segment struggled for a significant part of the second half. Renewed investor confidence in the sector following its favorable valuations and strong fundamentals worked in its favor.
While technology mutual funds surged 13.1% during the quarter, the broader technology sector – Technology Select Sector SPDR ETF (XLK - ETF report) –emerged as the top performer among S&P 500 sectors by gaining 10.2% during the same time frame.
Solid price performance of Apple Inc. (AAPL - Analyst Report) played a major role in boosting the sector during the quarter. Strong demand for the newly launched iPhone 7 and 7 Plus drove the tech giant’s shares, which in turn had a positive impact on the broader technology sector. Preorders for the new iPhones touched record highs within a few days of the launch. According to Sprint, iPhone 7 Plus and iPhone 7’s preorders during the first three days following their release were up 375% compared with preorders of iPhone 6S series after their release last year.
Weakness in Samsung, which is one of the biggest competitors of Apple in the smartphone market, also helped its cause during the quarter. The Korean giant had to recall millions of Samsung Galaxy Note 7 devices due to defective batteries.
Then again, Apple’s reputation of being able to perform well in a volatile scenario, which has also been proved in recent times, also boosted its popularity among investors. Shares of Apple surged 18.6% during the third quarter, which also includes its best four-day rally since Apr 29, 2014. Also Read: Ride the Apple Rally on these 4 Mutual Funds.
Impressive Q2 Earnings Performance
Apart from Apple’s rally, other factors including better-than-expected second-quarter results also played their part in leading the technology sector to register strong gains during the third quarter. Major players within the domain including Microsoft (MSFT - Analyst Report) , Alphabet (GOOGL - Analyst Report) , Amazon (AMZN - Analyst Report) and Facebook (FB - Analyst Report) delivered strong results during the second quarter. Moreover, earnings performance of major semiconductor players was also encouraging.
During the second quarter, S&P 500 tech companies rebounded strongly after dull performances in the previous two quarters to witness quarterly earnings and revenue growth of 1% and 1.5% respectively, compared with the overall S&P 500 companies’ performances of negative 2.8% and 0.2%. The trend is likely to continue in the third quarter as the sector’s earnings are expected to decline 1.9%, much lower than that of the S&P 500’s decline of 3.1%, as per the Earnings Trends report.
Additionally, a strengthening economy and better job prospects gave a nice boost to economically sensitive growth sectors like technology that typically perform well in a maturing economic cycle. Moreover, a significant decline in the first half of the year made the sector attractive, which also led investors to pour their money into these companies. Favorable cash reserve of most of the tech companiesput them in a position to increase payouts to their shareholders, which in turn also played an important role in boosting demand of these securities.
Significant cash reserves also provide a shield for these companies. The cash reserves ensure that these companies are not plagued by financial trouble even in a rising interest rate environment, the chances of which are high toward the end of the year.
Best Performing Technology Funds in Q3
In this backdrop, it will be interesting to find out which mutual funds from the space emerged as the standout performers in the third quarter.
We have highlighted five technology mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We also expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
These funds also come with low expense ratios and with no sales load. Moreover, they have encouraging year-to-date, one-year and three-year annualized returns, and the minimum initial investment is within $5000.
Fidelity Advisor Electronics A (FELAX - MF report) invests a bulk of its assets in securities of companies engaged in manufacture, design and sale of electronic goods. Its annual expense ratio of 1.36% is significantly lower than the category average of 1.48%. This Mutual Fund Rank #1 product returned 22.4% during the third quarter. It also has year-to-date, one-year and three-year annualized returns of 27.1%, 41.9% and 24.6%, respectively.
Victory RS Science and Technology Y (RIFYX - MF report) primarily invests in equity securities of companies from technology domain. Its annual expense ratio of 1.24% is significantly lower than the category average of 1.48%. This Mutual Fund Rank #2 product returned 18.7% during the third quarter. It also has year-to-date, one-year and three-year annualized returns of 15.5%, 31.7% and 11.5%, respectively.
Fidelity Select Technology (FSPTX - MF report) invests large chunk of its assets in common stocks of companies that are believed to get benefitted from technology advancement. Its annual expense ratio of 0.76% is significantly lower than the category average of 1.48%. This Mutual Fund Rank #1 product returned 15.5% during the third quarter. It also has year-to-date, one-year and three-year annualized returns of 14.4%, 26.6% and 14%, respectively.
Putnam Global Technology A (PGTAX - MF report) invests lion’s share of its net assets in securities of companies in the technology industries. Its annual expense ratio of 1.28% is significantly lower than the category average of 1.48%. This Mutual Fund Rank #1 product returned 15.5% during the third quarter. It also has year-to-date, one-year and three-year annualized returns of 14.2%, 29.5% and 17.7%, respectively.
Columbia Seligman Global Technology A (SHGTX - MF report) invest major portion of its assets in companies throughout the globe that carry on operation related to technology sector. Its annual expense ratio of 1.41% is significantly lower than the category average of 1.48%. This Mutual Fund Rank #2 product returned 14.7% during the third quarter. It also has year-to-date, one-year and three-year annualized returns of 14.1%, 26% and 19%, respectively.
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