It’s been a big few weeks for the tech sector, with some of the world’s largest companies reporting their latest results. Artificial intelligence (AI) spending and cloud growth have remained firmly in focus.
Concerns about whether current levels of AI investment are sustainable after the US midterms contributed to a sharp sell-off in tech shares last week. The sector has since recovered some ground, but further swings are possible, with chip giant Nvidia still to report.
Despite the recent ups and downs, there’s plenty of exciting long-term trends shaping the tech sector. For investors looking for exposure to these themes, index funds can be a great, low-cost way to invest.
This article is not personal advice. If you’re unsure whether an investment is right for you, ask for financial advice. Investments rise and fall in value, so you could get back less than you invest.
The tech sector is a large part of global markets
Tech has grown to become an important part of global stock markets. It continues to capture investors’ attention, particularly with the rapid development of AI.
Today the sector makes up around 30% of the global stock market – without including companies like Meta (formerly Facebook) and Google owner Alphabet that do not technically sit in the tech sector.
For investors who want to invest in the sector directly, tech index funds can provide broad and low-cost exposure to hundreds of tech companies.
How can you invest in tech through an index fund?
The Legal & General Global Technology Index Trust tracks the FTSE World Technology Index. It invests in tech companies across both developed and advanced, although still higher-risk, emerging markets.
The fund gives investors a straightforward way to invest across the tech sector without having to choose individual companies themselves. It currently invests in over 260 companies.
It does participate in securities lending, where some of its investments are lent to other providers in exchange for a fee, which adds risk.
What's actually under the bonnet?
Despite holding hundreds of companies, the fortunes of a relatively small number of businesses can have a big impact on returns. Given the size of the world’s largest tech companies, this is probably no surprise.
Nvidia, Apple and Microsoft make up 14.3%, 12.9% and 10.2% of the fund respectively, while the ten largest companies account for 66.6%.
It’s a similar story geographically. The fund invests globally, but 81.8% is invested in the US, leaving investors heavily reliant on just one market.
What if you don’t want the concentration?
Concentration isn’t necessarily a bad thing as long as you’re aware of it. After all, big bets pay off if the companies you’re backing do well – though the reverse is also true.
But if you want to be more selective, and potentially more diversified, in your tech investments, active fund managers take a different approach.
Active managers decide which companies to invest in and how much to invest in each. This gives them greater flexibility to manage exposure to the sector's largest companies and invest differently from the wider market.
The Polar Capital Global Technology Fund, for example, looks for high-quality companies the managers believe can benefit from big long-term trends, like AI.
The fund has 68 holdings – fewer than a typical index fund which invests more broadly.
While the fund still backs the tech giants, its positions are smaller. For example, Nvidia is the fund’s largest holding at 9.6%, while the ten largest holdings account for 45.3%. The fund has 69.9% invested in the US.
The managers use derivatives to manage exposure to large tech names. That can magnify any gains or losses and increases risk.
Investors get access to a different mix of companies and countries than they would by simply following a tech index. The aim is to outperform the index, but this is never guaranteed.
What does this mean for investors?
Index funds can be a useful and low-cost way to invest in a specific sector, like tech. Though it’s important to understand what you’re investing in and how it fits alongside the rest of your portfolio.
However, index funds investing in specific or specialist sectors are often more concentrated and higher risk than more diversified funds. That means they should usually only make up a small part of a well-diversified portfolio, sitting well alongside broader funds or perhaps active funds looking to invest in the same sector.
Annual percentage growth
Oct 21 – Oct 22 | Oct 22 – Oct 23 | Oct 23 – Oct 24 | Oct 24 – Oct 25 | Oct 25 – Oct 26 | |
|---|---|---|---|---|---|
Legal & General Global Technology Index | -17.83% | 28.25% | 43.61% | 38.08% | 12.59% |
Polar Capital Global Technology | -25.70% | 17.22% | 40.82% | 67.04% | 27.50% |
IA Technology | -22.47% | 13.71% | 32.05% | 32.14% | 12.33% |