Voo Stock – 401(k)s and Retirement Savings Plans are Being Threatened by Tech Stocks Rout
Many American retirement savers could be in for an unhappy discovery in the wake of Thursday’s tech-led stock market rout.
Some of the largest funds in workplace retirement savings plans such as 401(k)s, which investors likely assumed were well-diversified, are not. A handful of mega-cap tech stocks make up around 30% of some of the most popular funds in retirement plans, according to data compiled by Bloomberg.
Those big slugs of tech have rewarded investors handsomely — in 2020, Apple Inc. gained more than 80% and Amazon.com Inc. more than 76%. But when benchmark 10-year U.S. Treasury bond yields spiked to a one-year high on Thursday, and fears grew that an era of very low interest rates could be nearing an end, the soaring valuations of mega-cap tech stocks became harder to justify and the shares led the broad market down.
“Some clients have been surprised to see some name-brand, mega-cap tech stocks drop so quickly,” said Noah Damsky, of Los Angeles-based Marina Wealth Advisors.
Damsky said his firm had been talking with clients in 2020 and into 2021 about how focused gains were in a handful of tech stocks. “The way I explain it to them,” Damsky said, “is that the stocks that started the party are the ones that will likely suffer the most when the party ends.”
An S&P 500 index fund becomes highly concentrated in a handful of hot stocks in a hot sector by virtue of its design. With mega-cap tech shares on a tear, and a stock’s weight in the S&P index determined by its market capitalization, just five tech companies — Apple, Microsoft Corp., Amazon, Facebook Inc., and Google parent Alphabet Inc. — make up 24% of the index, up from 17% at the start of 2020.
The $255.9 billion Vanguard Institutional Index Fund, one of the most popular funds in 401(k) plans, has 22% in those stocks, and a 1.9% slug of Tesla Inc. to boot.
Tech stakes are even higher for some of the most popular actively managed mutual funds in retirement savings plans.
The $132 billion Fidelity Contrafund has 31.3% in six stocks — the same heavyweights that rule the S&P 500 — and Netflix Inc. Amazon, Facebook and Microsoft made up almost 24% of the fund as of Dec. 31, data compiled by Bloomberg show.
That concentrated strategy has paid off. Contrafund has a one-year return of 32.94%, a three-year return of 16.24% and a 5-year return of 19.74%. Being even more concentrated in mega-cap tech than the S&P 500 led Contrafund to handily beat the S&P 500’s returns over those same periods.
The $98.1 billion T. Rowe price Blue Chip Growth fund, another retirement plan favorite, is yet more concentrated in mega-tech — and its returns have, in turn, been even higher than those of Contrafund. Amazon makes up 11.3% of the fund, and when Facebook, Alphabet, Microsoft and Apple are added in, mega-tech makes up 34.7% of the fund.
“The big retirement funds know better, but they are being measured on short-term performance every day, and if they aren’t living up to client expectations, they will be out of a job,” financial adviser Laura Mattia, of Sarasota, Fla.-based Atlas Fiduciary Financial said.
Marina Wealth’s Damsky says his firm has lightened up on mega-cap tech stocks “because we believe they have rallied as a result of ultra-low interest rates and we don’t see the risk-reward as favorable to the upside anymore, with rates so low.”