5 Best Technology Mutual Funds To Watch In 2018

This year has been quite eventful for the domestic equity markets, marked by the passing of the much-awaited Republican tax reform and three rate hikes. Following optimism over the implementation of Trump’s tax cut policies, the technology sector has clearly emerged as the best performing sector so far this year, not only for the broader S&P 500, but also among the equity mutual fund categories.

Although, a higher rate environment is likely to weigh on tech stocks, Trump’s tax repatriation plans could benefit technology companies that hold a lot of cash overseas. These tech companies could repatriate the reserves and for further use in investments, dividends and buybacks. In this context, investing in mutual funds from the technology sector still seems prudent.

Technology Sector’s Performance in 2017

The tech-heavy index, Nasdaq has beaten the other two key benchmarks, the Dow and the S&P 500 by a considerable margin so far this year. The Nasdaq has advanced 28.9% year to date, outperforming the Dow and the S&P 500, which increased 25.2% and 19.7%, respectively over the same period.

Moreover, the Technology Select Sector SPDR ETF (XLK) is the biggest gainer among the S&P 500 sectors, adding 32.6% so far in 2017. Additionally, technology mutual funds have increased 36.5%, notching the best gains among the major sector equity fund categories, per Morningstar. Technology mutual funds have also gained 35.6% this year.

Factors Contributing to Tech Gains

A strengthening economy and better job prospects provided a significant boost to economically sensitive growth sectors like technology that typically perform well in a maturing economic cycle. Moreover, the Tax Cuts and Jobs Act of 2017 lowers the corporate tax rate to 21% from 35%, per recent developments. Lower corporate tax will encourage tech companies to raise investment in new cloud services and data centers.

Further, Trump’s tax repatriation policy, which contains a one-time tax of 8% on illiquid overseas assets, is likely to improve the overall financial health of tech companies. The law also sets a 15.5% one-time tax on cash and cash equivalents held overseas, which in turn will help tech giants like Apple Inc. (AAPL – Free Report) , which has overseas cash of more than $250 billion at the end of the fiscal fourth quarter.