In the first quarter of 2026, the Baron Technology ETF (BCTK) experienced a slight decline of 6.90%, closely mirroring its benchmark, the MSCI ACWI Information Technology Index. Despite this, the fund outperformed both the Invesco QQQ Trust and the S&P 500 Index over a three-year period, demonstrating its long-term growth potential. This quarter's market environment was shaped by early optimism driven by pro-growth policies and strong economic data, later shifting due to concerns over AI-driven disruption in software and geopolitical tensions impacting energy supplies and economic stability. These dynamics led to a notable rotation out of growth-oriented stocks into cyclical and defensive sectors, yet the fund remained committed to its strategy of investing in transformative technology trends, particularly in artificial intelligence.

The fund's performance was significantly influenced by its strategic positioning in the evolving AI landscape. Key contributors to performance included optical networking leaders like Lumentum Holdings Inc. and Coherent Corp., alongside semiconductor equipment giant Lam Research Corporation. Conversely, declines in certain software holdings, such as PAR Technology Corporation and Zscaler, Inc., and non-IT positions like Tesla, Inc. and Spotify Technology S.A., partially offset these gains. A major strategic move during the quarter involved initiating new positions in tech behemoths Alphabet Inc. and ASML Holding N.V., reflecting a sharpened focus on companies that are integral to the burgeoning AI infrastructure, from custom silicon to advanced lithography systems. The fund’s management actively engaged with industry leaders and experts to inform its high-conviction portfolio decisions, especially amidst the rapid pace of AI innovation.

Looking ahead, the fund anticipates continued growth opportunities within the AI ecosystem, particularly in infrastructure, silicon, and networking. Investments in companies like NVIDIA, Broadcom, Alphabet, and Amazon underscore a belief in their structural advantages in AI development and deployment. The fund also expanded its exposure to power infrastructure, recognizing energy as a critical constraint for AI scaling, with new positions in Solaris Energy Infrastructure Inc. and Forgent Power Solutions, Inc. While acknowledging the transitional challenges facing the software sector, the fund has strategically consolidated its holdings, favoring resilient companies that leverage AI to enhance competitive advantages and are led by visionary management teams. This proactive and adaptable approach aims to capitalize on the profound technological shifts of the 21st century, focusing on long-term value creation for investors.

The fund's forward-looking strategy is rooted in a deep understanding of the transformative power of technology, particularly AI. By focusing on companies that are not just adopting but also defining the future of technology, the fund aims to deliver sustained capital appreciation. This involves diligent research, active management, and a willingness to adapt the portfolio to emerging trends and market dynamics, ensuring that investments align with the most impactful and enduring secular growth themes. This commitment to innovation and strategic foresight positions the fund to navigate complex market conditions and unlock the vast potential of the technology sector for its investors.