After a long run, funds with heavy weightings in technology stocks have stumbled. But that’s leaving room for strategies that have lagged far behind to shine.
Many value stock, dividend, and small stock funds have posted gains, even as growth-heavy strategies have been in the red since mid-July. That includes funds from Invesco, Franklin Templeton, and State Street’s SPDR lineup. Even some funds that had been bottom performers compared with similar strategies are seeing their rankings flip.
In the background, tech stocks (especially semiconductor stocks) have fallen sharply since July 10, when the Morningstar US Technology Index hit its most recent peak. Since then, that index has lost 11.9% through Aug. 8 and the Morningstar US Semiconductors Index lost 20.9%. During this time, the broad market as measured by the Morningstar US Market Index fell 5.1%
Here’s a look at the 10 US diversified stock funds with the strongest returns during this rotation out of tech stocks. The screen considered funds with a Morningstar Medalist Rating of Bronze or higher and more than $100 million in assets. All return figures are as of Aug. 8.
Performance data for this article was based on the lowest-cost share class for each fund. Some funds may be listed with share classes not accessible to individual investors outside retirement plans. The individual investor versions of those funds may carry higher fees, reducing returns.
Small-Caps and Value Return
Since the tech selloff, the top 10 funds have looked different from how they have over the past year. During that time, the list has been dominated by tech-heavy growth funds. Six were value funds and six focused on small-cap stocks. Compare that with the 10 worst performers since July 10, when every fund was in the large growth category.
These trends reflect the broader market, with the Morningstar US Small Cap Index returning 0.6% since July 10 and the Morningstar US Value Index returning 1.7%, compared with a 6.0% decline in the Morningstar US Growth Index and a 6.9% loss for the Morningstar US Large Cap Index. Looking at the past year, the Large Cap Index outperformed the Small Cap Index by 13.5 percentage points, while the Growth Index beat the Value Index by 1.6 points.
The top performer was the $1.5 billion Invesco S&P SmallCap 600 Revenue ETF RWJ from the small value category, which returned 9.1%. The fund tracks a version of the S&P 600 SmallCap Index weighted by companies’ revenues, rather than the way many indexers are weighted by market capitalization.
Funds Jump From Last Place to First
Besides posting top returns, these funds moved out of the basement within their Morningstar Categories. While the period in question is exceptionally short, the scope of the swings is dramatic.
Each of the top funds lands in the top 3% of their categories when measured by one-month returns through Aug. 8, with five in the top 1%. A month earlier, only three were even in the top half of their categories, with four in the bottom 10%. The largest change was seen by the $1.3 billion Fairholme FAIRX, which went from the 100th percentile in its category to the 2nd over the past 30 days.
The bump in the past month was even enough to pull six of the funds’ one-year returns through Aug. 8 above their category average. A month earlier, only one fund had a higher-than-average one-year return.
The Best-Performing Funds Were Low on Tech, Lower on Chips
While six of the top 10 held less than 5% of their portfolios in tech stocks, there were significant exceptions. The $208 million DF Dent Small Cap Growth DFDSX holds 26.6% in the sector, and three other funds also have double-digit allocations. However, none of the funds had more than 1% in the semiconductor industry, one of the hottest parts of the sector during the recent AI boom. Five had no allocation here, according to the most recent data in Morningstar Direct.
The $595 million Franklin US Low Volatility High Dividend ETF LVHD follows an index of stocks that show low volatility and pay high and sustainable dividends. The fund’s holdings are characterized by a “conservative positioning, favoring utilities and consumer defensive stocks relative to the benchmark,” writes Zach Evens, a manager research analyst for Morningstar. The fund offers “solid downside protection.”
Another example is the $2.8 billion Virtus KAR Small-Cap Growth PSGCX. While it is in the small-cap growth category, “rather than looking for stocks with the highest growth prospects, the team targets companies with reliable revenues, high profit margins, and low financial risks with promising upside potential,” according to Tony Thorn, a manager research analyst for Morningstar.