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Tech Delivers Big Returns for Lower Risk, Axioma Says

Low volatility and growth factors have produced higher returns in the sector this year, according to Axioma.

The information technology sector has outperformed the broader stock market this year and with less risk to investors.

The sector, as a category in the Russell 1000, beat the index in the first four months of 2017, posting a 15.1 percent return compared to 7.1 percent for all Russell 1000 companies. Though technology stocks are sometimes viewed as risky, they have the third-lowest risk level among 11 sectors in U.S. large caps, behind consumer staples and consumer discretionary, according to an Axioma report this month.

The information technology sector has evolved considerably over the decades with the introduction of new behemoths such as Apple. The gap between tech's weight in the Russell 1000 and its contribution to the overall risk in the index has been narrowing over the past few years.

“The gap has been relatively small, and shows perceived risk may be overstated,” Melissa Brown, managing director of applied research at Axioma, said by phone. “If you know you want to have 10 percent of your portfolio in technology stocks, chances are you aren’t going to be adding to risk if you increase your exposure.”

One of the major reasons for lower risk across all sectors, including tech, is low correlation between stocks, according to Brown.

The good news for asset managers and analysts is the proportion of risk in the information technology sector that is stock-specific is relatively high compared to the early 2000s, the report noted. This allows more possibility for stock-pickers to find returns.

Brown created a custom risk model to identify the style factors that would help investors pick stocks in the sector. Low volatility, medium-term momentum, and growth stocks have produced higher returns this year, compared to dividend yield, earnings yield, and profitability factors, Brown wrote.

The information technology sector can be used to hedge risk in a portfolio, since it has a low or negative correlation with other sectors, and can also hedge against a rising U.S. dollar, Brown said.

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