Tech is currently a very popular destination for capital. Ongoing easy money policies and compression of risk premia have incentivized investors to push more and more money into “high beta” stocks and bet on companies that are innovative, have perceived competitive advantages, and are still rapidly growing. As mentioned in a separate article, this has distorted the valuations of the most popular tech companies in the world (namely, AAPL, GOOG, MSFT, AMZN, FB, BABA, TCEHY) from their earnings. Forward real returns in the market are already estimated at about 2% lower from their historical norms in annualized terms. Despite low market-wide volatility – almost on a global scale – and higher tech demand, there are still many risks inherent in businesses that are heavily reliant on a single product for their bulk of their revenue and earnings (e.g., AAPL), businesses that are not yet stable and consistently generating profits (e.g., AMZN), or those that have a lot of capital invested in future technological innovations, in which there’s a high level of uncertainty (e.g., more or less all of the abovementioned in a way). Yet given recession risk is low, there remains confidence in central banks, volatility is low, and all asset classes have been bid up to unattractive prices, this creates a desire for more risk-taking. In Vanguard’s information technology ETF, VGT, over half the fund is dedicated toward the top ten holdings, with a preference for large-cap names. Two stocks make up one-quarter of it – AAPL makes up about 14% of the fund, followed by MSFT at a bit over 9%. Google collectively takes up 10% with its two share classes, followed by FB, V, INTC, CSCO, ORCL, IBM, and MA. After that, no other name takes up more than 2% of the fund. AVGO, NVDA, QCOM, TXN, ACN, ADBE, PYPL, and CRM take up between 1%-2%. The fund is structured such that “higher-quality” (basically a proxy for market capitalization) and higher demanded equities have greater weighting. Many household names, such as EBAY, EA, MU, HPQ, and HPE have representation of around 0.5%-1.0%, so their action is less influential on the price of the index compared to the largest-cap stocks. AMD, which has been on a tear since early 2016, is represented at just 0.21%, which is light given its $10B-$20B market cap but done purposely as a consequence of its historic boom-and-bust price action. The same follows for TWTR at 0.20%. Once representation falls below 0.20%, publicly recognized names become few and far between as there’s more mid-cap presence. Once strong companies, such as VMWare (VMW) and Xerox (XRX) appear at 0.11%-0.12%. Square (SQ) and Zillow (Z), still very much newer companies, are included at 0.09%. Online food-delivery company Grubhub (GRUB) takes up 0.07%; Ellie Mae (ELLI), which originates 25% of all US loan applications, comprises 0.06%; domain registrar and web hosting service GoDaddy (GDDY) takes up 0.06%. One of the more popular companies at the moment, Snap (SNAP), with debate raging on its competitive prospects with AAPL, FB, and GOOGL having the size and scale to disrupt its photo-sharing features, has 0.06%. Although the company is worth some $20 billion there is no guarantee that it will ever turn a profit. It’s unclear whether mobile advertising can bring it there eventually, though many investors are betting on its ability to branch out into other products or services to monetize its daily active user base, some 170 million strong. Gaming company Zynga (ZNGA) has 0.05%, riding a continuing wave of mobile phone penetration. 3D Systems (DDD), which had been wildly successful immediately post-IPO, running from $13 per share to $96+ less than three years later (7.3x return), has since dropped all the way down to around $20-$25 per share. Investors believed 3D printing to be the future in the run-up after the IPO. And while 3D printing certainly will play a key role moving forward, with many firms acquiring 3D printing assets (e.g., GE), competitors have since caught up with DDD and its stock has tumbled. Its market cap is around $2.5 billion and has a 0.04% weighting in the fund. TiVo (TIVO) (0.04%), which was all the rage in the early-2000s for its show-recording capabilities, has since been supplanted by other technology. The company still has products in demand, but shareholder returns have been very poor, as it hasn’t stayed on top of the shifting technological landscape. Shares were $68+ in 2011, but are now at or under $20. Yelp (YELP) (0.04%) provides online reviews for various businesses through a crowdsourced format. Revenues come via advertising, which is a low-leverage means of monetizing its 135+ million monthly visitors, but its ability to sell products or services is limited based on the site’s value-add. Music-streaming platform Pandora (P) (0.03%) which went public in June 2011 is now trading among all-time lows due to the sheer amount of competition in the industry. Several of the big tech companies have launched music services, with even Tesla (TSLA) (of all companies) trying to get in on the action. For shareholders, Pandora’s best bet is likely to pursue a sale of the company. Ambarella (AMBA) (0.03%), which provides image processing products, has fallen heavily since July 2015 after returning 20x to its shareholders less than three years after its IPO. AMBA is heavily dependent on a few main customers, including struggling GoPro (GPRO), which creates volatility in its revenue and earnings streams. Technological shifts are also difficult to stay on top of for smaller companies (AMBA has a sub-$2 billion market capitalization), which lack the R&D budgets of larger firms. Oclaro (OCLR), which sells optical components predominantly for fiber-optics telecommunications networks, has been popularly talked about given its doubling in price since the summer of 2016. Given its sub-$2 billion market cap it also represents just 0.03% of the index. The Trade Desk (TTD) (0.02%), widely regarded as an upcoming company in the ad-tech vertical, offers companies a marketplace to advertise across a variety of different advertising channels as the content distribution landscape continues to change. The company’s share price has more than doubled since its September 2016 IPO. Its market capitalization is just over $2 billion. Twilio (TWLO) (0.02%) has been a disaster since September 2016, falling back to around its opening price to the public. The service works by allowing clients to receive/make/send phone calls and text messages via APIs, with revenues based on usage fees. The uniqueness of its service resulted in a big surge post-IPO, but since then the stock has disappointed on revenue results. Like a host of smaller tech companies, it will need to watch out for larger firms entering its space by copying its technology. And with a more limited R&D budget, it is often more difficult for these firms to adjust once technological shifts begin happening, so there is a level of antiquation risk. Pure Storage (PSTG) (0.02%) IPOed in October 2015 and provides enterprise flash storage solutions. It is currently below its IPO price. The market hasn’t been convinced that the company is handily beating the competition (or future competition) and gaining foothold with its products. Its financial numbers have nonetheless come in fine and competition remains low, but the market has cooled on its growth expectations since the IPO. Match (MTCH) and MeetMe (MEET) (both 0.01% representation) have also seen positive price run-ups recently as daily communication becomes more electronic and interaction with strangers over these channels becomes more socially acceptable. Both are social networks, with Match owning several different platforms including Tinder, OkCupid, PlentyOfFish, and Match, which are predominantly themed around dating or meeting new individuals through mobile devices more generically. Revenues typically come in the form of advertising, virtual-currency sales, and/or subscriptions to access premium features. Fitbit (FIT) (0.01%) is suffering from the same issues as most small-cap tech companies. It provides products (wearable activity trackers) that are easy to copy by bigger players in the market and has a low competitive moat accordingly. Fitbit is likely to reorient the business more toward corporate wellness programs and/or as a data source that can be of use to hospitals, insurance policy underwriters, among others. Fitbit peaked the month after its June 2015 IPO and has since lost nearly 90% of its value. __ In total, there are 364 companies in this index (all of which are listed below and in their representation in the fund). Picking individual stocks is always an option, but those betting for or against a rising tide with respect to the sector more generally have tech ETFs to serve that function. Vanguard is the cheapest on the market, with sector-specific ETFs generally only costing 0.10% of the total amount purchased as an add-on fee. Also, while Amazon (AMZN) and Tesla are considered “tech companies” by many/most, they are generally officially treated as “consumer goods” companies and are not included within the index.