What is it?
The technology, media and telecommunications sectors (TMT) are very closely linked and often dealt with as a single unit, with many companies fitting into all three categories. Their performance depends heavily on robust research & development to create patents for cutting-edge products and services. It is an extremely fast-paced industry with thousands of new entrants every year, making the space highly competitive. Some products include semiconductors, hardware, software, mobile and mobile apps, internet, networking, and social media. It also includes media companies as they are often symbiotic with technology and telecoms.
Why is it important?
The TMT sector is the largest sector of the US equity market, occupying nearly 20% of the entire equity market by market cap. Given its huge weighting, significant changes in the TMT sector have the power to move the entire market, contributing $1.6 trillion to the economy every year. Technology spending is incredibly important and has also been shown to boost a nation’s efficiency dramatically and increase economic growth, especially in emerging economies. It is currently the 6th largest job-creating industry, posting almost 3 million jobs per year in the US alone.
- Technology: Intel, Microsoft, Alphabet (Google), Apple, IBM
- Telecommunications: Verizon, AT&T
- Media: Facebook, Netflix, Walt Disney
- iShares US Technology
- Vanguard Info. Tech.
- iShares Evolved US Media & Entertainment
When does it do well/badly?
The tech sector thrives in a bull market when consumption is high and interest rates are low. Its strong reliance on research and development makes it extremely sensitive to increases in interest rates, which make funding new projects more challenging. TMT stocks are known as “cyclical,” meaning their performance depends on whether the market is in a growth phase or a recession. In a bull market, TMT stocks tend to outperform other sectors, but underperform in a recessionary environment. These companies also have foreign revenue streams, which makes their performance sensitive to fluctuations in exchange rates.
Why should I invest?
The tech sector is an extremely high-growth industry that can make a massive impact on the returns of your investment portfolio. We rely more and more on technological inventions in our daily lives and as a driving force in business. The tech sector will continue to grow at a rapid pace, so incorporating it into a portion of your portfolio is essential if you want to achieve above-average returns. However, you must be aware that these stocks are also vulnerable to market cycles, so maintain a diversified portfolio.