Here’s a way to bounce back from a market correction

0

February and March have reminded many that the stock market is going in several directions. After a two-year run with barely a hiccup, the S&P 500 Index has “corrected,” a period in which the index has fallen by at least 10%. This is what it looked like, measured by the SPDR S&P 500 ETF, which tracks the 500 stocks of the S&P 500 index.

Data by YCharts.

The roller coaster has been tough for many investors, but for those investing in the cutting edge of the economy, the emotional rush has been a bit easier to manage.

A way to beat the market

Investing in fast growing companies can be a winning strategy, and there’s no better place to start than the tech industry. Technology has become the fastest growing segment of the economy, and according to the US Bureau of Labor Statistics, about a quarter of economic output and 5% of the US workforce now comes from technology.

Stock market charts displayed on a computer screen

Image source: Getty Images.

This strong growth resulted in an outperformance of the market. This has been on display in a big way over the past couple of months. As tech stocks fell along with the broader market – illustrated here by the Vanguard Information Technology ETF (NYSEMKT: VGT) and IShares PHLX Semiconductor ETF (NASDAQ: SOXX) – they have rebounded much faster and are still touting gains for the year, while the S&P 500 is struggling to make up for lost ground. Exchange traded funds (ETFs) contain stocks of many stocks and allow investors to easily obtain a range of holdings in a security.

VGT chart

Data by YCharts.

Why are the returns above the market? The technology has become more than a small niche in the US economy. It has taken over every other industry – from manufacturing to healthcare to finance – and is an integral part of everyday life. As a result, sales and profitability increased above average. This faster-than-average growth means these stocks are growing faster.

Choosing individual winners in tech can be tricky and risky, but you can still profit from industry growth through an exchange-traded fund (ETF) like the ones mentioned. Vanguard’s information technology fund is well diversified across the IT industry with over 350 stocks, while the iShares PHLX Semiconductor ETF focuses more specifically on semiconductors and consists of 30 stocks.

Metric

Vanguard Information Technology ETF

IShares PHLX Semiconductor ETF

Fund net assets

$ 20.9 billion

$ 1.7 billion

Number of actions

358

30

Annual management fees

0.10%

0.48%

Dividend yield

0.92%

0.83%

Data sources: Vanguard and iShares.

A word of warning

Investing in high growth companies is not for everyone. They can often be volatile and go down more than the overall market at times. This has been particularly the case for semiconductor stocks, which can undergo cycles of growth and contraction due to changing demand.

VGT chart

Data by YCharts.

In the long run, however, the technology beats the S&P 500 at large. This underlines the importance of technology which must be at the heart of every investor’s portfolio. It has become the driving force behind the American economy and is driving change in businesses of all types. All signs point to this trend continuing for many years to come, and it could be growth that helps your portfolio bounce back better from the market turmoil.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

Leave A Reply

Your email address will not be published.