Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Ways to Play the Tech Boom
ASX ETFs Offer the Tech World, with Currency a Potential Bonus
Investors are realising that without meaningful technology exposure, their portfolios are missing a major growth driver. However, the difficulty of picking individual stocks should not be under-estimated, with the innovations and business models of many tech stocks hard to grapple with.
Exchange-traded funds (ETFs) are helping a lot of investors get this exposure without having to worry about whether they have chosen the right stocks: the ETFs own whole indices of them.
ETFs have made it easy to access both local technology companies and offshore giants with just a single trade on ASX. The ETFs are suitable as both cost-effective long-term core portfolio holdings and as short-term trading vehicles.
All of these ETFs are unhedged, meaning that investors are exposed to fluctuations in the A$/U$ exchange rate – which can at times augment returns, just as it could, in other circumstances, work against them. While this might put off some investors, others may view the currency risk as actually another layer of diversification: given that most Australian investors hold at least 70%-80% of their assets in A$, a range of currency outcomes, that are not just A$-based, might be attractive.
BetaShares NASDAQ 100 ETF (ASX code: NDQ)
One of the simplest way to get exposure to the tech giants listed on the NASDAQ Stock Market in the US is through the NASDAQ 100 ETF offered by BetaShares. The ETF provides exposure to the 100 largest non-financial securities listed on the Nasdaq stock market, by market capitalisation. NDQ tracks the performance of the NASDAQ-100 Index, before fees and expenses.
The top holdings currently are: Apple (11.6% of the portfolio), Microsoft (11.3%), Amazon (11.1%), Google’s parent company Alphabet (7.3%), Facebook (4.1%), Tesla (2.6%), NVIDIA (2.3%), Intel (2.2%) and Netflix (2.1).
Since inception in May 2015, the ETF has earned 20.8% a year, versus 21.1% for the index. In the year to June 2020, NDQ generated 35.5%, compared to 35.9% for the index.
NDQ costs investors 0.48% a year. It is not currency hedged.
ETFS FANG+ ETF (FANG)
ETF Securities’ FANG+ ETF is designed to provide investors with a return (before fees and expenses) that tracks the performance of the New York Stock Exchange (NYSE) FANG+ Index, which was created by ICE Data Indices, LLC. The index is an equal-weighted index of ten holdings, of shares or American Depositary Receipts (ADRs) in ten major high-growth global stocks including Apple, Amazon, Alibaba, Baidu, Facebook, Alphabet (Google’s parent company), Netflix, NVIDIA, Tesla and Twitter.
The index represents some of the world’s most innovative technology leaders and smartest technology-enabled companies, some of which – for example, Apple, Amazon and Alphabet – have grown to rank among the most valuable companies on the global stock market. Half of the constituents are from the technology sector, while 30% and 20% come from the consumer cyclical and communication services sectors respectively.
The index assigns equal weighting to its ten holdings, rather than apportioning investment by proportion of market capitalisation, as are most major global indices, such as the S&P 500, FTSE-100 Index and S&P/ASX 200 Index. Equal-weighting means that the performance of each company’s stock is equally important in determining the total value of the index: there is a body of academic research that points to equally weighted portfolios outperforming their market capitalisation counterparts over the long term and over almost all short-term periods. This is mostly due to the effect of selling high and buying low when rebalancing the portfolio, as is done regularly in an equal-weighted portfolio.
The inception date of FANG+ was 27 February 2020, so it doesn’t yet have an annual performance figure. But as at 9 July 2020, it had earned investors 33.7%, against 33.5% for its benchmark index, the New York Stock Exchange (NYSE) FANG+ index.
FANG+ costs investors 0.35% a year. It is not currency hedged.
BetaShares S&P/ASX Australian Technology ETF (ATEC)
Launched in March, BetaShares’ ATEC is the first ETF to solely track Australian listed tech companies, including the WAAAX stocks (Wisetech, Afterpay, Appen, Altium, Xero), Australia’s answer to the FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks.
The ETF aims to track the S&P/ASX All Technology Index (XTX), an index of about 50 top Australian tech stocks that was launched in February. As well as the IT companies on the ASX, the All Technology Index also includes tech companies in consumer electronics, health care, internet marketing and media. Between April 2014 and May 2020, says BetaShares, the S&P/ASX All Technology Index produced an annualised return of 14.9% a year, compared with a return of 5.5% a year for the S&P/ASX 200 Index. In return for tracking this index, the ATEC ETF costs 0.48 % a year in management fees.
Launched in the middle of the COVID Crash, ATEC promptly fell by 34.3%, but has rebounded well – it is up 84% from its March low, to be up 21.1% from its initial price.
ETFS Morningstar Global Technology ETF (TECH)
Launched in April 2017, TECH aims to provide investors with a return that tracks (before fees and expenses) the performance of the Morningstar Developed Markets Technology Moat Focus Index. This index uses Morningstar’s proprietary Moat methodology, which includes only those companies that the research firm identifies as possessing strong competitive advantages relative to their peers. This index includes companies that generate their revenue from hardware, software and IT services: however, companies that many people would assume would be in a technology index – such as Amazon and Facebook – are not included. While these companies have a heavy technology association to their products or services. Morningstar assigns them to other sectors because their revenue does not come directly from the sale or licensing of their technology. TECH uses an equally weighted index – each stock, regardless of size, has the same index weight.
US companies make up 78.4% of the portfolio, followed by German stocks (6.4%), French (6.2%) and Japanese (3.7%). In the year to June 30, TECH earned 27.2%, just under its index. For the three years to June 30, TECH delivered 25.1% a year, while its benchmark index returned 25.4% a year.
TECH is managed for 0.45% a year. It is not currency hedged.
ETFS ROBO Global Robotics and Automation ETF (ROBO)
Launched in September 2017, ROBO is a targeted ETF that provides exposure to global robotics, automation and artificial intelligence companies. ROBO aims to provide investors with a return that tracks (before fees and expenses) the performance of the ROBO Global Robotics and Automation Index, an index developed to represent the global value chain of robotics, automation and artificial intelligence (RAAI) related companies.
For the selection process, the Index classifies companies as either (1) “bellwether” stocks, the majority of whose business is related to robotics and automation; or (2) “non-bellwether” stocks, that have a distinct portion of their business involved in robotics and automation. The index allocates 40% to “bellwether” and 60% to “non-bellwether,” and equally weights stocks within the two categories.
About 48% of the portfolio is invested in US stocks, with Japan (19.6%) and Taiwan (7.3%) the next largest domiciles. IT companies make up 49.4% of the portfolio, with the rest spread across the industrials, healthcare and consumer discretionary sectors.
Since inception in September 2017, the ROBO ETF has earned 11.3% a year, compared to 12% a year for its index. In the year to June 30, ROBO gained 13.6%, versus a 14.4% gain for its index.
ROBO is not currency hedged. Its annual management cost is 0.69%.
BetaShares Global Cybersecurity ETF (HACK)
Another targeted tech ETF, HACK is aimed at investors who want exposure to the expected boom in cyber-security spending. The portfolio is 87.4% invested in US companies, with the UK (3.8%) and Israel (3.3%) the next-largest allocations. Systems software dominates the industry breakdown, at 50.4% of the portfolio, followed by communications equipment (12.4%) and internet services and infrastructure (10%).
The index is designed to track (before fees and expenses) the Nasdaq Consumer Technology Association Cyber-Security Index, which comprises 43 companies. This is a diversified collection of companies, but most are small and mid-cap companies that are not well-known in Australia. At present the five largest holdings are: Crowdstrike Holdings (6.8% of the portfolio), Splunk (5.8%), Okta (5.7%), Broadcom (5.6%) and Cisco Systems (5%).
Since inception in August 2016, the HACK ETF has earned 18.8% a year, lagging its index, on 19.4% a year. In the three years to June 30, HACK generated 20.3% a year, versus 20.8% for the index.
HACK costs 0.67% a year in management fees. It is not currency hedged.
BetaShares Asia Technology Tigers ETF (ASIA)
The ASIA ETF is designed to give investors exposure to some of the best Asian technology stocks, and give them an alternative to a Nasdaq-centric tech exposure. ASIA aims to track the performance of an index (before fees and expenses) comprising the 50 largest technology and online retail stocks in Asia (excluding Japan): this index is the Solactive Asia Ex-Japan Technology & Internet Tigers Index.
The ASIA portfolio includes technology giants such as Alibaba, Tencent, Baidu, JD.com, Taiwan Semiconductor Manufacturing, Samsung and Infosys. Chinese stocks represent 55% of holdings, followed by Taiwan (20.5%), South Korea (18.1%) and India (5.6%).
Since inception in September 2018, ASIA has earned its investors 23.4%, versus 24.2% for the Solactive Index. In the year to June 30, the ASIA portfolio delivered an impressive 47.4% gain, slightly behind its index, at 47.9%.
ASIA costs investors 0.67% a year. It is not currency hedged.
Leveraged Long and Short Nasdaq Exposure
Another trading opportunity for technology-oriented investors is the launch this week, by ETF Securities, of its ‘Ultra’ trading products over the Nasdaq 100 index – the ETFS Ultra Short Nasdaq 100 Hedge Fund (ASX code: SNAS) and ETFS Ultra Long Nasdaq 100 Hedge Fund (LNAS).
Both exchange-traded hedge funds allow investors to trade leveraged exposure to the Nasdaq 100 index, one of the world’s most prominent large-cap growth indices, featuring iconic companies like Apple, Google, Intel and Tesla.
LNAS aims to provide investors with geared returns that are positively related to the returns of the Nasdaq 100 index, between 200% and 275% of its net asset value.
SNAS aims to provide investors with geared returns that are negatively related to the returns of the Nasdaq 100 Index: that is, if the Nasdaq 100 Index falls in value, SNAS will rise in value. The fund provides exposure to the Nasdaq 100 Index of between -200% and -275% of its net asset value.
Both these ETFs are currency hedged. Each achieves exposure to the Nasdaq 100 Index using derivatives. They invest mainly in a portfolio of short E-mini Nasdaq 100 Futures contracts listed on the Chicago Mercantile Exchange. With the extra cost of leverage and hedging, both LNAS and SNAS cost investors 1% a year.
The crucial caveat here is that leveraged products can not only magnify gains, they also magnify losses – they are not long-term buy-and-hold investments. Investors need to be aware of their risk tolerance and continually monitor their investment when using these products.
