Featured Article: How methodology affects US technology index performance
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How can you identify the optimal US technology sector investment? Identifying the best investment in the US technology sector requires a multifaceted approach. Increasingly, investors are recognising the crucial role of index methodology in this process.
It is a common misperception that two indexes covering the same market segment must be, essentially, interchangeable. But a better constructed US technology index can enable you to meet your investment objectives with greater precision. How an index is constructed and maintained may sound theoretical—but the potential impact on performance is real.
The concentration conundrum
The technology industry continues to be top of mind as market participants monitor the ups, downs, and changing prospects of big-name firms. As several powerhouse companies have grown into mega-cap territory, their dominance in popular indexes has come under scrutiny.
Investors are increasingly tuned in to the need to manage the concentration risk presented by traditional cap-weighted indexes. Some are seeking strategic diversification while others must also consider limits designed to ensure diversification and protect fund investors. For example, Regulated Investment Company (RIC) capping rules for US-registered funds require that the aggregate share of companies with weights greater than 5% be limited to 50% (known as the 5/50 limit), and that no individual company have a weight greater than 25% of the fund.
Capping leads to differences in holdings and performance
We see a notable difference in the largest holdings of RIYWC versus S&P’s Technology Select Sector Index, which uses a different capping methodology. The Technology Select Sector Index, Apple was weighted at less than 5% as of August 30, 2024. In RIYWC, Apple’s weight was more than 16%. Other differences in holdings—such as Alphabet and Meta Platforms—are due to underlying industry classifications.
Related content: How and when do we cap indexes?
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Our research provides valuable and unique insights into the structural differences and investment opportunities within European markets. It underscores the differentiated opportunities and risks within the Eurozone, shaped by the interplay of fiscal stimulus, market composition, and economic growth dynamics. An overview of what it means:
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Using (US) ETFs for tax loss harvesting
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Tax loss harvesting isn't about exiting the market but finding opportunities. Staying invested allows participation in potential market gains, as seen in 2023 when US equities surged by 14% in the last two months. Daniel explains that you can avoid missing out by sticking to your plan and considering ETFs like IWF (iShares Russell 1000 Growth ETF) for exposure to growth-oriented stocks or funds, or IWD (iShares Russell 1000 Value ETF) for value stocks or funds.
Please note ***iShares ETFs are not sponsored, endorsed, issued, sold or promoted by FTSE Russell or LSEG. Nor do FTSE Russell or LSEG make any representation regarding the advisability of investing in any of the products. iShares is not affiliated to FTSE Russell or LSEG.***
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