Why you should care about tech stock troubles
Tech stocks began Wednesday by continuing a calamitous two-day drop started the week prior that's wiping out billions of dollars of value from the likes of Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT).
Should people who aren't active investors care? Many should, especially those with a 401(k) or IRA -- and that's just over half of Americans. If you have one of these accounts, it's more than likely you have a stake in a tech giant, whether you know it or not.
Apple, Microsoft, Alphabet (GOOG) and Facebook (FB) are all in the top-10 most popular stocks in mutual funds, according to data from Morningstar, the investment analysis company. (Alphabet, the owner of Google, appears several times, thanks to its multiple share classes.)
While mutual funds aren't synonymous with retirement accounts, they're the most common way for Americans to participate in the stock market. Most households that invest in mutual funds do so through an employer-sponsored retirement account, according to the Investment Company Institute, the industry's main trade group. And 46 percent of mutual funds assets are owned by retirement accounts, according to the ICI.
First created in the 1920s in their modern form, mutual funds pool money from many investors and use it to buy shares of companies in a combination designed to achieve a particular outcome.
Apple, the most popular stock by far, is held by 861 mutual funds -- more than a third of all the mutual funds in existence. Microsoft is held by almost as many. Alphabet, Cisco (CSCO), Facebook and Amazon are also all in the top 10.
Given how important tech companies have become in the U.S. economy, there's no real way to avoid owning them, according to experts.
"A mutual fund that's trying to provide its investors with a way to invest in large domestic stocks will probably have at least some allocation in technology, because tech accounts for about a quarter of the stocks out there," said Brian Reid, chief economist at the ICI.
Index funds -- designed to passively mimic a particular index, like the S&P 500 or the Nasdaq -- will have a set amount of money allocated to companies based on their market cap.
"If you look at the top five holdings of the S&P 500 index, it's Apple, Alphabet, Microsoft, Amazon and Facebook," said Reid. "They're the five largest firms in the market, and they're probably the five largest holdings of an index fund."
But for actively managed funds -- the majority -- the calculus is somewhat different. In that case, mutual fund managers can choose what to include in their portfolios. And many are betting on tech.
"A lot of managers really view these as durable, long-term growers, and they want to make big bets on some of these names, like Amazon or Facebook," said Katie Reichart, associate director of equity strategies at Morningstar.
"Some of these names are already a big part of the benchmark [a metric, often an index, against which a fund's performance is judged], and oftentimes managers will want to own even more than that," Reichart said.
