Do You Really Want to Be Buying Tech at These Levels?
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Tech stocks are back like it’s 2020/2021 all over again. Actually, it is not the entire tech sector, although it remains the top-performing sector year-to-date by almost any measure. The mega-cap names, particularly the very top of the Nasdaq 100, are driving the gains. Do the fundamentals support such a rally? The U.S. economy and labour market have remained resilient for longer than most anticipated a year ago at this time, so a rebound from last year’s bear market was probably justified, but a rally that’s recovered more than ⅔ of those losses? Probably not.
The BlackRock Science & Technology Trust (NYSE:BST) is one of the most popular closed-end funds for investors who want to combine tech exposure with high yield. It’s had a pretty good run in 2023 itself, but pull back the view a bit and it’s essentially flat over the past year compared to a 16% gain for the Nasdaq 100. I’ve reviewed this fund in the past, but given how wild the tech sector is right now, I think it’s time to revisit it again, look at the portfolio & its relative value and see where it stands again in the current market.
Fund Background
BST’s investment objective is to provide income and total return through a combination of current income, current gains and long-term capital appreciation. It does this by investing in U.S. and non-U.S. science and technology companies in any market capitalization range according to their rapid & sustainable growth potential and potential to generate current income from advantageous dividend yields. It will also employ a strategy of writing covered call options on a portion of the stocks in its portfolio.
Fund Features
A broad tech sector-covered call fund does and doesn’t appeal to investors in this environment. Folks who are focused more on getting high yields from their investments will probably like the mix of growth and income. People who are simply looking to maximize returns will probably ditch the covered call strategy and just go with a pure tech ETF. BST has more than $700 million in assets, so this fund is still clearly benefiting from the decade-long bull market in tech and growth, but investors should understand that there will be a cap on gains here due to the covered call overlay. The 25% allocation to small-caps, which I’ll get into a little later, also alters the risk/return profile.
Sectoral Graph
BST’s 60% allocation to software and chip stocks looks pretty similar to what you’ll find in most broad tech sector portfolios. Beyond that, the composition gets quite different. The remainder of the large-cap tech space is split between hardware & media/entertainment names, but BST spreads out its investments into more non-traditional investments. The 9% allocation to financial services is relatively new in the past few months and primarily includes payment processors, including Mastercard (NYSE:MA), Visa (NYSE:V) and GMO Payment Gateway Inc (TYO:3769). The consumer side includes internet-based businesses, including Alibaba (NYSE:BABA), Amazon (NASDAQ:AMZN), Grammarly and Trip.com Group (NASDAQ:TCOM). Looking at the sector exposures at a high level may give somewhat of an incorrect perception because these are all essentially tech-adjacent businesses.
