Looking for the Next Nvidia May Shrink Your Return
Trying to guess who will be technology’s Next Big Thing is just another form of stock picking...
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
GLOSSARY
Profitability: A company’s operating income before depreciation and amortization minus interest expense scaled by book equity.
FOOTNOTES
1. Magnificent 7 include Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Named securities may be held in accounts managed by Dimensional.
2. See exhibit disclosure for full list of key words.
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