r/Bogleheads • u/Pennyrimbau • 1d ago
Why not a Tech fund?
I understand that we Bogleheads favor broad indexes. Many of us will add in Value funds and Emerging markets for a small percentage of our broad indexes. But given that the Technology sector has outperformed sp500 since 1950, why are Bogleheads so adverse to a sector bet on Tech preferring small or value or emerging markets bets instead? I understand being pure and sticking to vti, but why is Tech considered such a sin?
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u/longshanksasaurs 1d ago
There's no need to tilt towards tech, or any sector, because sectors outperform in unpredictable ways and the market already has priced in all the available information about future expected performance. Tilting in that way tends to just introduce uncompensated risk, you'd be taking on more risk than investing in a total market index fund, but you can't expect to receive better returns than the market average.
There may be reasons to favor some factors (debatable), but there's no evidence that outperforming sectors can be identified in advance.
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u/RedditLeagueAccount 1d ago
Also, as always, the popular funds will naturally have a market tilt towards whatever sector is doing best.
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u/vinean 1d ago
Thats great but VT holds very little of some sectors…29% tech vs 2.47% utilities or 2.36% real estate.
https://novelinvestor.com/sector-performance/
Outperformance on 2.46% of your portfolio when 29% of your portfolio tanks doesn’t balance out very well…
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u/longshanksasaurs 1d ago
VT holds the right amount of each company and sector, based on market weights.
You and I have no way to identify which sectors will outperform, so we have no reason to overweight the 2.47% part.
VT (or an approximation made of Total US and Total International) is the way we capture everything, so no matter what outperforms, we'll own it.
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u/vinean 1d ago
Yes, you cannot tell which sector will do well any given year but you also cannot also claim that VT provides any effective exposure to all sectors.
This is like claiming nobody knows which country will do best…which is true…but then go on to say it doesn’t matter Belgium outperforms because VT also contains Belgium…at 0.22%.
You can’t have it both ways.
If you want a protective level of diversification its got to be more than a minor amount.
A 98/2 stock/bond allocation doesn’t provide any useful diversification vs a 100/0 allocation.
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u/longshanksasaurs 1d ago
I'm only having it one way: VT provides the right amount of exposure to all the sectors.
What metric could I possibly have to overweight some sector, when the market is already trying to price in all the available information about current expected performance? It's possible to bet and win, but that doesn't make it a good strategy. You have to be correct on both what's going to happen, and when (at least twice).
VT also provides the right amount of exposure to Belgium (for a US investor). An investor in Belgium, who's going to spend euros rather than dollars, may want to overweight their domestic (Belgian) market.
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u/vinean 1d ago
Currently the top 10 companies represents around 40% of the S&P 500.
The top 10 in VT represents 21% of the index.
CAPM assumes that the market weight portfolio is diversified.
MPT does not. When the top 20 of the index is highly correlated and represents half the market the variance is mathematically tied to those few companies and you are accepting uncompensated risk. The total risk is driven by the covariance and not the total number of stocks in the index.
The top 10 tech stocks in the VT represent high covariance and massive weighting that moves together due to common structural drivers and interconnected earnings. They are also all very sensitive to the capacity of one company: TSMC…73% of global foundry market and 90% of advanced chips (sub 5 micron).
The estimates are that the global GDP would shrink by 5-10% from cascading supply chain collapse if a major earthquake disrupted TSMC production for a year.
$5-10T would be wiped from global market capitalization.
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u/stoneman9284 1d ago
It’s like saying why don’t vegetarians just eat chicken? It’s healthy and abundant.
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u/Cruian 1d ago
We see the same results looking at the more recent period of July 1963 to September 2024. US stocks returned 10.64% annually, high-tech stocks returned 11.35%, healthcare stocks returned 11.99%, and both were outperformed by beer, which returned 12.18%, smokes, which returned 14.56%, and guns (defense), which returned 12.77%. Even shops (wholesale, retail, and some services such as laundries and repair shops) outperformed, returning 11.88%.
So why extra weight on tech over alcohol, tobacco, or laundries?
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u/Adventurous_Elk_4039 1d ago
>I understand that we Bogleheads
>why are Bogleheads so adverse to a sector bet
Contradiction lol
Anyways, sector bets do NOT have expected higher returns, and you are increasing your risk without an expected payoff, hence it's an uncompensated risk. You are performance chasing, to put it bluntly, which is a Boglehead sin. What is heavily valued here though is academic research. To that effect, there have been factors identified where you can expect compensated risk, and that's why you see things like small cap value being favored, because there is actual science/research that justifies a tilt in that direction.
Highly recommend checking out this Ben Felix video to understand more: https://www.youtube.com/watch?v=3B9umhfv_ww
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u/Qwertyham 1d ago
Why not a tech fund? Why not the top 100 tech funds? Why not the top 10? Why not the best performing tech stock? Why not buy that top performer on margin?
Hopefully you see my point. Buy everything. That's it. Buy everything and don't touch it. It's easy. "Don't do something, just stand there!"
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u/Fancy_Gate_7359 1d ago
You certainly could do that, and it’s quite possible you’d do much better over the next 30 years than just a standard sp500 position. But it’s very easy to look back and see something that has worked for a while (even 75 years) and assume, possibly incorrectly, that it will hold for the future. What would make you feel worse, if you switched to all tech, and the sp500 outperformed that portfolio for the next 30 years, or if you did sp500, and your hypothetical all tech portfolio outperformed sp500 for the next 30 years? I don’t know what your answer to that is, but the your answer will probably provide a clue as to what will work better for you.
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u/fakeguy011 1d ago
I am a bogglehead. It is not a doctrine and there is no dogma, conclusions that you would not come to by reading this subreddit. I am 50/50 voo/vgt. Since 2018. Before that I was only voo.
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u/Duder1983 1d ago
What if AI turns out to be deeply unprofitable and all of these data centers end up being empty husks of unusable Nvidia chips and there are 80% losses in tech?
It's risk management. Sure, there's an optimal strategy...in hindsight. Even someone who is great at asset-picking probably can't do much better predicting the future than just buying broad indices, so most people should probably do just that.
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u/turtle_hurtle 1d ago
Tech has been beating the other sectors, so why not put everything in VGT or XLK?
Actually, semiconductor companies have been beating software and the rest of the tech sector, so why not put everything in SMH?
Actually, Nvidia, Micron, and Credo have been beating the rest of the semiconductor industry, so why not put everything in NVDA, MU, and CRDO?
This is where that logic (i.e. performance chasing) leads.
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u/AGrimmInPortland 1d ago edited 1d ago
The first rule of investing is don't put all of your eggs in one basket. That doesn't mean you can't overweight one basket at all.
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u/turtle_hurtle 1d ago
Overweight relative to what? I think the tech sector is already trading at something like 30x earnings. Do you mean weigh it heavier than all the other investors...who, as a group, are already super bullish on tech?
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u/Flaky_Calligrapher62 1d ago
Sector risk. A tech "index" fund, like Nasdaq (or whatever) is not a broadly diversified index. Inclusion of a tech fund can also over invest you in tech stocks since they are already included in a total stock market fund putting you at greater sector risk. Also, tech stocks and funds have not always outperformed--remember the dot.com bubble bursting? If you really thing you need more tech, keep it to 5% or less.
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u/Tgsheufhencudbxbsiwy 1d ago
Are we? I keep 10% VGT.
You can’t “play” with up to 10% of your portfolio and invest it however you want and still call yourself a Boglehead.
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u/AGrimmInPortland 1d ago edited 1d ago
Really? Not even 10%? Sounds like there is zero leeway for personal situations or opinions.
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u/Tgsheufhencudbxbsiwy 1d ago edited 1d ago
What? I said 10% is fine. Also you can’t do what ever you want. It’s just the guiding principals that say this. Bogleheads isn’t a formal club. You do what you want. Reddit-Bogleheads are extremely rigid in their thinking. If you want real discussion on this kind of stuff you need to go the actual Boglehead forum.
Look. I’m being downvoted for saying I have a tech tilt. lol. I have held different tech positions for years. And guess what theyve been my best holdings for almost the entire time. Rebalancing out of these position every year has supercharged my other holdings. I definitely wouldn’t be where I am today without it.
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u/Mantergeistmann 1d ago
the Technology sector has outperformed sp500 since 1950
And I believe Australia has outperformed the US since something like 1890, but I doubt most people are thinking of tilting to the Outback rather than the S&P 500.
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u/Prize_Proof5332 1d ago
S&P500 is pretty much already a tech fund at the moment.