The year’s hottest stocks apparently flew too close to the sun.
U.S. Momentum Factor ETF (VFMO), which holds the stocks that performed best over the past 6 and 12 months, was Vanguard’s worst-performing fund in July, down 10.3%. Information Technology ETF (VGT) fell as much as 9.5% intramonth before rallying 4.9% on July 30 to finish down 5.3%.
Coming into the year, I said I thought AI and tech stocks were in a bubble. Whether the bubble is bursting or simply taking a breather is unknowable in real-time.
For a little perspective, the chart below shows how Information Technology ETF and 500 Index (VFIAX) have fared over the past 15 years. 500 Index shareholders have compounded their wealth at a solid 14.5% annual clip—better than the index fund’s 11.7% return since its 1976 inception.
That’s nothing to complain about, though it pales next to the tech sector’s 20.6% annualized return over the past 15 years.
A word of caution: Do not expect the tech sector to keep up this level of outperformance. Over the past 15 years, technology stocks have gone from 18% of 500 Index’s portfolio to 38%. For context, the tech sector’s weight in the flagship index fund maxed out around 30% during the 1990s tech bubble.
In other words, it’s highly unlikely that tech stocks will continue to compound at better than 20% annual rates or beat the broad market by six percentage points per year over the next 10 to 15 years.
Does that mean you should ditch all your tech stocks? No.