NEW YORK (CNN/Money) -
On the eve of Halloween, you know what scares me the most these days?
No, not the sight of all those Tyco employees wearing tighty-whiteys at their Sardinia "retreat."
What truly scares the living daylights out of me is that many of the tech funds that were the biggest losers during the bear market are among the best performers this year. The average tech fund is up 53 percent year-to-date, according to Morningstar.
A bag of rocks
Two sector funds from ProFunds -- a mutual fund group that aims to match or exceed the performance of popular market indexes -- are leading all tech funds. The ProFunds Ultra Semiconductor and ProFunds Ultra Internet funds are up 151 percent and 130 percent so far this year.
But the average annualized three-year losses on these funds are a ghastly 33 percent and 54 percent. That's enough to make your head spin. (Think Linda Blair in "The Exorcist." Talk about scary.)
Want some more tech fund tricks? Amerindo Technology is up 75 percent so far this year. But it fell 65 percent in 2000, another 51 percent in 2001 and 31 percent last year.
Berkshire Focus has soared nearly 70 percent this year but has posted an average annualized loss of 50 percent over the past three years. The Delaware Tech Innovation fund is up 55 percent year-to-date, but has had an average annualized three-year loss of 43 percent.
"A lot of the funds in this rally are really some of the more speculative, riskier ones around and investors should be careful about chasing their performance," said Christopher Traulsen, an analyst with Morningstar.
Now of course, there's no such thing as a "safe" tech fund. The sector, by its very nature, is incredibly risky and subject to booms and busts. In fact, none of the tech funds tracked by Morningstar have reported gains on average over the last three years.
But there are some funds with a better track record during the lean times. And those are the types of funds that are probably better off for an investor that wants to sleep soundly at night.
Candy everybody wants
Here are a few of those tech fund treats.
Icon Information Technology. Don't let last year's numbers fool you. While it did take a beating in 2002, falling 42 percent, it was down only 13 percent in 2001, a year when the Nasdaq fell 21 percent. And the fund actually finished 2000 with a 14 percent gain, while the Nasdaq plunged nearly 40 percent.
Over the past five years, the fund has an annualized average return of 19 percent. It's up 53 percent so far this year, with holdings such as Internet companies J2 Global Communications (JCOM: Research, Estimates) and United Online (UNTD: Research, Estimates) as well as semiconductor firms OmniVision Technologies (OVSN: Research, Estimates) and Marvell Technology (MRVL: Research, Estimates).
Waddell and Reed Science & Tech. The fund may only be up 25 percent this year. But its focus on healthcare, in addition to traditional tech, has enabled it to post average gains of 13 percent during the past five years, very strong in a bear market.
In addition to tech and telecom stocks like Vodafone (VOD: Research, Estimates) and Cisco (CSCO: Research, Estimates), the fund also includes holdings like health insurer Anthem (ATH: Research, Estimates) and biotech Genzyme (GENZ: Research, Estimates).
T. Rowe Price Media and Telecom. To emerge through the telecom bloodbath of the past few years with just a 5 percent annualized loss while the average loss for telecom funds is 25 percent is remarkable. What's more, the T. Rowe Price Media and Telecom fund actually sports a 12 percent return over the past five years. The average telecom fund has posted a 4 percent loss during the same period.
Instead of a heavy focus on struggling U.S. telecoms, this fund has a strong international bent, with five of its top ten holdings in foreign telecoms, such as Mexican wireless firm America Movil (AMX: Research, Estimates) and Israeli wireless company Partner Communications (PTNR: Research, Estimates).
And four tech funds that Morningstar's Traulsen thinks are solid long-term bets are Northern Technology, Pimco RCM Global Technology, Fidelity Select Technology and Seligman Communications and Information.
Tech lite: great returns, less risk
Still, because the tech sector is so volatile, diversified growth funds are often a safer way to satisfy a jones for tech.
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"There are plenty of funds that have between 25 and 33 percent of their assets in techs. Most people would be better off with that kind of aggressive growth fund," said Sheldon Jacobs, editor of the No-Load Fund Investor newsletter.
One such fund that Jacobs likes is the Oberweis Micro-Cap, which has about a third of its assets in tech stocks. At first glance, this might seem like a fund to avoid since it has already surged 100 percent this year.
But the track record speaks for itself: a three-year annualized return of 21 percent and five-year return of 24 percent. Like the Icon fund, top holdings also include J2 Global Communications and OmniVision Technologies.
Finally, for investors looking for some exposure to larger companies, Brandywine Blue is an appealing option. The fund, with a five-year annualized return of 10 percent, has more than a third of its assets in techs, including top ten holdings Nextel (NXTL: Research, Estimates), Hewlett-Packard (HPQ: Research, Estimates) and Oracle (ORCL: Research, Estimates). Brandywine Blue is up 25 percent so far this year.
Anyway, the lesson is that as tech continues to soar, investors need to do more than just pile into funds with the biggest returns during the past few months. Or to quote the King -- no, not LeBron James -- at least not after one game anyway -- "Wise men say, only fools rush in."
Sure, Elvis was probably talking about love and not mutual funds. But you get my point.
Boo!
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