ETF Overview
iShares U.S. Tech Breakthrough Multisector ETF (NYSEARCA:TECB) owns a portfolio of U.S. large-cap stocks that will benefit from many different breakthrough technologies. These breakthrough technologies include robotics, artificial intelligence, cloud and data centers, cybersecurity, genomics, immunology, and financial technology. This means that TECB’s portfolio will include not only the information technology sector but also other sectors. However, this diversification may not be able to offer better long-term return, as growth potential in other sectors still lags the information technology sector by a wide margin. Hence, we think long-term growth investors should continue to focus on traditional technology ETFs that solely focus on the information technology sector.
Fund Analysis
TECB generally outperforms the S&P 500 in a bull’s market, but underperforms in a bear’s market
TECB is a relatively new ETF, as its inception date was in January 2020. Therefore, we can only check its performance in the past 4 years. In fact, its performance since its inception in 2020 was quite strong, outperforming the S&P 500 index by a good margin. As can be seen from the chart below, since its inception, its share price has increased by over 80%. In contrast, SPDR S&P 500 ETF (SPY) which tracks the S&P 500 index has only risen by about 56.7%. This fund has generally outperformed the broader market in a bull’s market and underperformed in a bear’s market. Like the broader market, TECB declined sharply and underperformed the S&P 500 index in most of 2022 due to the Federal Reserve’s aggressive rate hike. As soon as the market turned positive, TECB also outperformed the S&P 500 index since the low reached in October 2022.
A more diversified portfolio than traditional technology ETFs
Unlike traditional technology ETFs that are mostly focused on companies that develop innovative technologies, TECB is much more diversified. As can be seen from the chart below, TECB’s portfolio also includes companies from the communication, health care, financials, consumer discretionary, real estate, and industrial sectors. Although information technology companies still represent about 55.6% of its total portfolio, other sectors also represent 44% of the total portfolio. For reader’s information, stocks in its portfolio that belong to the information technology sector include Nvidia (NVDA), Microsoft (MSFT), Salesforce (CRM), Advanced Micro Devices (AMD). Other notable non-tech companies in TECB’s portfolio include Merck (MRK) which belongs to the health care sector, and Visa, which belongs to the financial sector.
Should you own TECB instead of traditional technology ETFs?
For investors wishing to own a fund that outperforms the broader market, TECB may be a good choice as its return was better than the S&P 500 index since its inception. The question is whether this fund is a good choice to replace traditional technology ETFs. To help answer this question, we invite readers to take a look at the chart below. In this chart, we compare TECB with two other technology ETFs: iShares US Technology ETF (IYW) and Technology Select Sector SPDR ETF (XLK). As can be seen from the chart, both IYW and XLK outperformed TECB in the past 4 years. In fact, IYW and XLK delivered price returns of 119.2% and 113.7% respectively. In contrast, TECB’s price return was only 80.6%.
This difference is likely due to the fact that TECB includes not only technology stocks, but also stocks from many different slower growth sectors. For example, the health care sector and financial sector each represents about 12% and 8.4% of TECB’s total portfolio. However, these two sectors’ long-term earnings growth rates are usually inferior to information technology sector. Yardeni Research has regularly gathered the consensus of analysts on earnings and growth forecast on all companies in the S&P 500 index. Based on their gathered information which published on April 26, 2024, the consensus current year earnings growth rate for health care and financial sectors are about 9.3% and 7.8% respectively. While this growth may sound robust, the consensus earnings growth rate for information technology sector is expected to be about 17.1% in 2024. This is far more superior than health care and financial sectors. In fact, information technology sector has typically outperformed health care and financial sectors in the past years as well. Therefore, funds such as IYW and XLK that focus solely on information technology sector have a higher chance to continue to outperform the more diversified portfolio of TECB in the long run.
Investor Takeaway
We think TECB is a better fund to own than the S&P 500 index, as it is likely that they will continue to outperform the broader market. While its portfolio is more diversified than any traditional technology ETFs, its long-term return will likely be inferior to traditional technology ETFs. Unless diversification is important, long-term investors that focus solely on returns should own traditional technology ETFs than TECB.