We need to talk about tech stocks. Because, yes, there is a risk of a pullback here. But there’s also a way for us to minimize that risk—and grab 8%+ dividends, plus price upside, as we do so.
First off, let me be clear that when I say “tech stocks,” I’m using the NASDAQ 100 as my benchmark. The index is about 60% tech, compared to about a third for the S&P 500. That higher level of tech exposure has allowed the NASDAQ to handily beat the S&P 500 over the long run (see the purple line below, showing the benchmark NASDAQ index fund).
NASDAQ Nearly Doubles the S&P 500
That outperformance started to slow last year, with the NASDAQ only barely edging out the S&P 500. And as I write this, the NASDAQ’s P/E ratio is 37.2, higher than at any point since the dot-com bubble and well above the S&P 500’s measure of 27.9.
Why the stretched valuation? The first thing that comes to mind is AI, which is already driving efficiencies outside the tech sector, such as in manufacturing, law and medicine.
Meantime, the existence of open-source models, plus fierce competition between tech firms like Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), OpenAI, Anthropic, Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and others, shows that AI will keep falling in cost, which could slow the continued rise of the large-cap AI stocks.
We’re Looking Beyond AI for AI-Driven Gains …
This, by the way, is part of our 2025 AI-investing strategy at CEF Insider: Spread our money across high-yielding closed-end funds (CEFs) that hold big-cap AI names and also invest in companies outside tech that are poised to profit from the technology’s continued growth.
Our Adams Diversified Equity Fund (NYSE:ADX) (ADX), for example, yields right around 9% now and not only holds firms like Microsoft, Alphabet and NVIDIA (NASDAQ:NVDA), but also stocks like JPMorgan Chase (NYSE:JPM), which stands to benefit as AI helps its portfolio managers make better decisions. ADX also holds Visa (NYSE:V), which is using AI to improve fraud detection, lower costs and boost its margins.
… While Minimizing Our Crypto Exposure
Another reason we could see a pullback in the NASDAQ this year is due to the resurgence of cryptocurrency driving unsustainable spending in the tech sector. We saw this in 2021, when surges in Bitcoin prices drove upward momentum on the NASDAQ. Then the bubble popped in 2022, and the NASDAQ slumped in sympathy.
With Bitcoin surging again, we could be at the start of another, similar cycle.
Consider, for example, the inclusion of MicroStrategy (NASDAQ:MSTR) in the NASDAQ 100. The stock is basically a Bitcoin proxy, and while it did surge on the announcement that it would join the index, it plummeted shortly after.
To be sure, one risky, unprofitable stock like MicroStrategy taking a tumble isn’t a major issue on its own (except to the people who own it, of course!). But if the stock is part of a broader index, it’s a risk to anyone investing in that index more broadly.
CEFs Let Us Avoid the “Index Risk” Stocks Like MicroStrategy Pose
This is a big reason why we prefer CEFs for investing in both tech and across the market—our funds’ active managers can navigate around risks like MicroStrategy, while index funds must hold the entire index at all times.
Moreover, looking ahead to 2025, if the NASDAQ falls behind the S&P 500 this year, more investors are likely to look for other ways to get tech exposure, beyond a NASDAQ index fund, and actively managed CEFs, with their high dividends, are likely to have a lot of appeal.
Tech CEFs Give You More of Your Return in Cash, Not Just “Paper Gains”
Speaking of dividends, tech-focused CEFs yield around 8% on average, as I write this. That high cash payout lets you capture profits from tech stocks more easily than you could with a NASDAQ-100 index fund like the Invesco QQQ Trust (NASDAQ:QQQ)—current yield 0.5%—where a selloff could erase your “paper gains.”
Below we see the market prices of two tech CEFs through 2024: the 8%-yielding BlackRock Science and Technology Trust (NYSE:BST), in purple, and the 12%-paying (and private equity–focused) BlackRock Science and Technology Term Trust (NYSE:BSTZ), in orange. The benchmark index fund, QQQ, is in blue
BST Underperforms—on the Surface
Looking at this, you might feel dissatisfied that BST underperformed the NASDAQ 100—could that suggest this CEF isn’t worth buying now?
Before jumping to this conclusion, remember that we’re looking at the total return–based market prices here (or the returns based on these funds’ prices on the stock market, including dividends).
If we look deeper, at our two CEFs’ total return–based net asset values (NAV, or the value of their underlying portfolios, including dividends received), we see that BST more or less matched the index (while returning a big slice of its gain in cash, thanks to its high dividend), while BSTZ actually trailed a bit:
Look “Under the Hood” and BST Looks a Lot Better
It makes sense that BSTZ is slightly behind when looking at these funds based on their portfolios, rather than their market prices, as this fund holds a large portion of private-equity assets that are still lagging as their recovery takes longer to realize.
This chart also suggests BST, which sports an 8% discount to NAV (or the gap between its market price and NAV), is a great buy now.
But more crucially, both BST and BSTZ have an advantage over the NASDAQ 100 that is now becoming increasingly valuable: They aren’t directly exposed to crypto.
Unlike the NASDAQ 100, neither fund has a position in MSTR, and they don’t invest in other volatile crypto firms, either. So if we see 2025 turn into a repeat of 2022 for cryptocurrencies, BST and BSTZ should fare much better than the index. And even if that doesn’t happen, the risks of a NASDAQ downturn are still likely to have a much lesser impact on these well-managed funds.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."