34 KIPLINGER’S PERSONAL FINANCE^ 03/2020INVESTING
DA
VIDPLUNKE
RTsmall tech firms will largely avoid
some of the risks tied to the tech be-
hemoths. “These firms aren’t in the
crosshairs of regulators over privacy
or antitrust issues,” he says.TRY THE SMALL FRY
Paulsen recommends shifting as much
as 50% of whatever you have allocated
to tech stocks into smaller names. For
broad exposure, consider INVESCO S&P
SMALLCAP INFORMATION TECHNOLOGY ETF
(SYMBOL PSCT, $96), which charges an
annual expense ratio of 0.29%. The
fund invests in a portfolio of 80 stocks
weighted by average market capital-
ization (share price times shares out-
standing), with the average stock
clocking in at $1.9 billion. Top holdings
include network testing equipment
maker Viavi Solutions, energy resource
management company Itron, and
Brooks Automation, which provides
materials and services primarily to
the semiconductor industry. (Prices,
returns and other data in this story
are through December 31.)
Mutual fund investors won’t find any
pure plays on small-cap tech stocks,
though they can invest in funds that
tilt heavily in their direction. Among
technology sector funds, USAA SCIENCE &
TECHNOLOGY FUND (USSCX) has relatively
limited exposure to giant firms, hold-
ing only 44% of assets in large caps,
compared with a 70% stake for its av-
erage peer. The fund’s 25% allocationBig-name leviathans have dominated the market, but the
minnows may be catching up. BY RYAN ERMEYIT’S NO SECRET THAT LARGE TECHNOLOGY
firms have led the way for much of the
bull market. By now, every investor
knows that FA NG stands for Facebook,
Amazon.com, Netf lix and Google
(although Google is now Alphabet).
From the beginning of the bull market
in 2009 through 2018, tech stocks in
the large-company Standard & Poor’s
500-stock index edged out tech stocks
in the small-cap S&P SmallCap 600
by a half-percentage point per year,
on average. As large-company stocks
pummeled small firms across the
board in 2019, Big Tech pulled in front
big time, returning 50.3%, compared
with 39.6% for small-tech firms.
But small tech firms may be poised
to close the gap. Jim Paulsen, chief
investment strategist at market re-
search firm Leuthold Group, likes to
refer to them as “mini FANGs,” and
he’s bullish on their prospects. Though
small tech firms typically command
an 18% valuation premium over large
tech names, he says, stocks in the S&P
600 Capped Information Technology
index currently sport the same average
price-earnings ratio as those in the
counterpart S&P 500 infotech index.
That’s even though analysts esti-
mate that over the next three to five
years, profits for the small tech stocks
will increase at twice the rate of big-
tech earnings, says Paulsen. And
although small stocks tend to come
with more volatility than large ones,PROFIT FROM
TINY TECH STOCKS
FUTURE FANGS34 KIPLINGER’S PERSONAL FINANCE^ 03/2020to pint-size firms may seem scant, but
compared with the 6% holding among
peer funds, it’s a big bet on the little
guys. Management of the fund is split
between teams at Victory Capital (who
manage roughly two-thirds of assets)
and Wellington Capital Management.
The Victory team screens for stocks
with sustainable earnings growth,
high returns on capital and improving
profit margins, before homing in on
stocks with niche businesses and ex-
cellent management teams. Welling-
ton’s team scours the globe for fast-
growing, high-quality firms with
market-leading innovations.