Looking for the Next Nvidia May Shrink Your Return

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The Magnificent 7’s performance in 2023 may leave some investors wondering how to spot the next Nvidia or Apple.1 Specifically, which technology disruptor will see its stock soaring next. Emerging technology–themed mutual funds and ETFs tout exposure to these opportunities.

Of course, investors with broadly diversified portfolios likely already hold many of the companies they hope will lead the innovation charge. But investors wanting to amplify this exposure should be aware that emerging tech strategies tend to have characteristics that suggest low expected returns. Exhibit 1 illustrates price-to-book and profitability characteristics for 13 US mutual funds and ETFs identified based on key words in the fund name, such as “disrupt” or “transform.”2 More than half of them (nine out of 13) lean toward growth compared to the broad market, as measured by the Russell 3000 Index, and all are less profitable than the market. In fact, most (eight out of 13) have lower profitability than the value segment of the market.

Ultimately, trying to guess who will be technology’s Next Big Thing is a form of stock picking. Historically, that’s been a losing bet for most fund investors. It’s better to overweight stocks based on systematic differences in expected returns rather than on speculation.

Exhibit 1 Waiting for the Next Big Thing
Emerging technology fund characteristics as of February 29, 2024

Source: Morningstar. US mutual funds and ETFs with fund names containing one of any of the following terms: tech, transform, innov, intel, metaverse, next, or disrupt.

 
DISCLOSURES

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. “Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. Please click here to read the full text of the Dimensional Fund Advisor Disclaimer.

About the Author Douglas Finley, MS, CPWA, CFP, AEP, CDFA

Douglas Finley, MS, CFP, AEP, CDFA founded Finley Wealth Advisors in February of 2006, as a Fiduciary Fee-Only Registered Investment Advisor, with the goal of creating a firm that eliminated the conflicts of interest inherent in the financial planner – advisor/client relationship. The firm specializes in wealth management for the middle-class millionaire.

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