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OTTAWA (GlobeinvestorGOLD) — Science and technology mutual funds offer an easy way for techno-dunces to invest in tomorrow's scientific advances, as long as you can put up with the fact that they're erratic and quite likely to disappoint.
Actually, these funds are a lot like the gadgets, software and computer chips developed by the companies they invest in. All kinds of promise and hype, but also much disappointment and outright failure. Frankly, it's an open question whether it's worth owning tech funds at all.
Anyone looking at putting money in a tech fund today will undoubtedly have at least faint hopes of cashing in the way investors did in this category in the 1990s. From 1994 through 1999, the average annual return for the science and tech category ranged from a low of 16.7 per cent to 110.6 per cent and included two years of gains around 50 per cent. These gains were made in the midst of one of the great stock market bubbles of all time and they will undoubtedly be the high water mark for technology investing.
Everyone knows what happened next. Starting in 2000, technology stocks collapsed and took tech mutual funds along for the ride. Almost unbelievably, the tech category lost 48 per cent on average in 2000, 60 per cent in 2001 and another 62 per cent in 2002. The next two years were in the red as well, but by less than 20 per cent in each case. The rise in the Canadian dollar versus the U.S. dollar exacerbated these terrible numbers in the past couple of years, but let's put the blame where it ought to be. Tech stocks are like TNT, which means they can easily blow up on you.
And yet, the appeal of tech investing remains, perhaps encouraged lately by some very modest positive returns for tech funds in 2005. For some people, the idea of investing in a company with a faster computer chip, a better cell phone, a superior laptop computer or a new cancer drug is a lot more appealing than buying the shares of a bank, railroad or supermarket chain. If this is you, then get over it.
The huge ups and downs of the tech market in recent years suggest that buying the sector through a mutual fund is the wrong way to go for long-term investors. Speculators who can spot an uptrend in technology and then sell in time to preserve gains may want to try tech funds, but everyone else is better off owning a diversified U.S. equity fund and leaving it to the manager to see if any technology stocks are worth holding. Tech plays like Apple Computer and Sandisk can be found in a wide variety of fund these days.
Investors with a decent level of expertise in technology investors are better off with exchange-traded funds than with tech mutual funds. The reason is that ETFs give you a way to burrow into the various tech sub sectors, such as networking, biotechnology, software, information technology, semiconductors and telecommunications (they're mainly listed on the American Stock Exchange at amex.com). If you can identify an especially promising sub-sector, you're better off buying it than having your investment dollars diluted in a science and technology fund that holds the gamut of tech stocks.
It so happens that the most popular ETF by far, the Nasdaq-listed QQQQ, or "Cubes," is essentially a broad-based tech fund. Cubes tracks the Nasdaq 100 index, which includes some of the biggest tech names out there as well as a sprinkling of such other names as Starbucks and Costco Wholesale. The performance of Cubes has not been markedly better than the average technology mutual fund in recent years, but this ETF's management expense ratio of just 0.2 per cent is far more attractive than a typical tech mutual fund's MER in the high 2-per-cent range.
If the urge to invest in technology is just too much to resist, find a good stock or ETF in the sector and make a small bet. As for the idea of riding tech to riches and glory through science and technology mutual funds, that's ancient history.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.