Factor investing in the technology sector

Abstract

This paper explores how well factor-based investing strategies do when applied to the technology sector, and how well they do against non-tech counterparts. It uses previous research into stock classification in order to select what stocks to include in the tech sample and the non-tech sample. From these, long-short portfolios are created to investigate the existence of abnormal returns and their eventual statistical significance. The differences between the tech and non-tech long-short portfolios are looked at, followed by the difference in risk-adjusted returns in the form of Sharpe ratios. The paper concludes that for three factors, there is no risk-adjusted advantage for either tech or non-tech stocks, and investors may choose tech for a higher risk and return profile or non-tech for lower risk but also lower return. For two factors, non-tech is found to be superior in terms of risk-adjusted returns, while tech is superior for one factor. Finally, one factor showed no significant differences in returns between tech and non-tech.