NEW YORK (CNN/Money) -
Technology stocks are enjoying a nice run, so it should come as no surprise that tech funds are this year's top performing stock mutual funds.
The group has a year-to-date return of nearly 13 percent. But investors thinking of chasing hot tech funds should think twice. For one, there are concerns about whether or not the sector's recent rally is for real or just another false start.
“ You really have to be careful ... with tech. If you pile on to what's been working you could be in for a big shock. ”
Fund analyst Christopher Traulsen
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Although hope is growing that things won't get worse for technology companies, bellwethers Dell, Hewlett-Packard and Intel have all indicated within the past week that they are not seeing any signs of an imminent improvement in corporate tech spending.
Another cause for concern: the best-performing tech funds so far this year are highly focused on the volatile Internet sector. Jacob Internet and Munder NetNet, for example, are both up more than 30 percent year-to-date, but the funds have fallen an average of 40 percent apiece over the past three years.
The surge in 'Net stocks is reminiscent of the late 1990s, raising concerns of another tech stock bubble.
"You really have to be careful with taking the rear view approach with tech," said Christopher Traulsen, a tech fund analyst with Morningstar. "If you pile on to what's been working, you could be in for a big shock."
In addition, the best performers are highly concentrated in just a few stocks, making them even more risky. According to FactSet Research, the sector's best performer, Amerindo Technology, up 48.1 percent, had more than 68 percent of its assets tied up in just four stocks as of March 31. They are eBay, Expedia, Amazon.com, and Yahoo!
The No. 2 tech fund is the ProFunds Ultra Internet fund, up 46.7 percent year-to-date. This fund is a leveraged fund that makes overweighted bets on companies in the Dow Jones Internet Index. Nearly 70 percent of the fund's assets are in just 10 stocks.
ProFunds also has a semiconductor fund, up 26.5 percent, that tracks the Dow Jones Semiconductor Index. Intel makes up nearly 40 percent of that fund's assets.
Traulsen said investors looking for tech exposure would be better off sticking to more diversified offerings that have solid track records and experienced research teams. But of course, any tech fund is going to be risky, given the volatility in the overall sector.
"Investors should never go into a tech fund expecting stability," said Traulsen.
Diversity is the key
Five funds that he singles out are Fidelity Select Technology, Pimco RCM Global Technology, Northern Technology, T. Rowe Price Science & Technology, and Seligman Communications & Information. Here's a brief look at each.
Fidelity Select Technology and Northern Technology are fairly similar, with both tending to favor large cap bellwethers. Cisco Systems, Dell Computer, Oracle, and Microsoft are among the top 10 holdings in both funds.
Pimco RCM Global Technology has more international exposure. Yahoo! Japan, German software developer SAP, French telecom equipment company Alcatel, and Chinese Internet portal Sohu.com are among the top 10 holdings.
T. Rowe Price Science & Technology features a blend of large-caps and mid-caps such as chip firm Maxim Integrated Products and software companies Adobe Systems and Veritas Software.
And despite its name, Seligman Communications & Information has steered clear of most of the beaten-down telecom service providers and network equipment companies. The fund has a broader tech focus, with big bets on disaster recovery software maker Sungard Data Systems, printer manufacturer Lexmark, and clinical lab testing firm Quest Diagnostics.
Traulsen said that although these five funds have not soared as high as some of the Internet funds this year, their diversity should limit their downside risk in the long run. And they all have expense ratios that are less than the tech sector's average of 2 percent.
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