Are Tech Stocks a Separate Asset Class?

ETFs help prompt a modern view of asset allocation

Reviewed by: Staff
Edited by: James Rubin

Financial advisors know that technology stocks are different, especially those based in the U.S. Thanks largely to the massive success of the now-largest stocks in that sector, some of which emerged from the 1990s internet growth period, these household names in the economy dominate their respective markets as if they were monopolies. 

That is a situation not lost on members of the US Congress, where both sides of the aisle have done some saber rattling about one day regulating some of those advantages that build up after years of innovation and sheer size. 

Big tech stocks have reached the point where advisors have to think of them similar to playing a team in a sport where that opponent has an all-time great player on their squad. You have to know where they are on the field, court or ice at all times, or you risk suffering for losing track of them. 

Advisors who manage money for their clients may may suffer from lagging performance when mega cap tech leaves everything else in dust, as it did much of last year. This has happened so frequently, it begs the question: When setting asset allocation for clients, should big cap tech be separated from other equities, as if it were its own asset class? 

The concept might seem awkward to some, and sacrilegious to others. But when we look at performance patterns in recent years, a case can be made.

ETFs to the Rescue for Advisors, Again 

At the risk of sounding like a broken record, what advisors should understand, even if they don’t make their own investment decisions, is that ETFs have allowed them to communicate about market trends in a way that simply has not existed for most of the history of providing financial advice. 

Before ETFs, there were indexes, but the data was hard to come by, not detailed as it is today, and was expensive to access. None of that is the case today. So we can easily apply some performance analysis to large cap U.S. tech stocks and draw inferences about whether it should, indeed, be an asset class all by itself. 

The $65 billion Technology Select Sector SPDR ETF (XLK) is a market capitalization weighted fund holding all the tech stocks within the S&P 500. Since the start of 2019, it is up about 196%.

Based on the size of the iShares S&P 500 Ex-Technology ETF (SPXT)—a mere $53 million in assets—it is probably not common knowledge among advisors and investors that it is easy to even access a “tech-less” version of the S&P 500. And for most of the past decade, who would bother anyway? 

But with the possibility that tech goes from hero to goat at some point (with goat not meaning “greatest of all time” as it often does in contemporary lingo), that might be the ideal time to think of tech as different from the rest.

Tech and the Rest

That higher return for XLK versus SPXT has come with higher risk, based on the relative standard deviation of the two ETFs that together comprise the S&P 500. XLK has been more volatile by a significant margin, except during the outbreak of the pandemic in 2020 when everything went down together. Over the past 12 months, XLK has run about a 16% standard deviation, while SPXT has checked in at nearly 11%.

That gap has been as wide as ever the past few years, indicating that investors have been increasingly comfortable with viewing tech as its own style. That only feeds the argument for allocation between the two, XLK and SPXT, as something akin to a floating allocation between them. 

This is more an academic question for now, but the message is clear: Tech and everything else just don’t perform the same, most of the time. That provides an opportunity for advisors to explain the differences to clients, all part of helping them better understand where their performance comes from. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.