Global technology giants powering along

Global technology giants powering along

Obrist says the case for investing in technology is about diversification and growth. “The Australian market is described as a bank next to a hole in the ground, with financials and materials accounting for around 51 per cent of the S&P/ASX 200. Investors’ portfolios will be instantly more diversified by increasing investments into technology.

“We are living through a new technology age with the US FAANGs, which are Facebook, Apple, Amazon, Netflix, Google, and the Chinese BATs, which are Baidu, Alibaba, Tencent, winning headlines around the world and flipping existing industries on their heads. To access this growth, you need to invest in these stocks.”

Different investment styles

Obrist believes earnings momentum, strong balance sheets and economy-wide transformational forces of innovation and disruption can provide cyclical and structural support for technology stocks.

“However, two obstacles for technology stocks are the potential for profit-taking in the short term, and regulatory scrutiny in the longer term. So far, the sector’s strong performance has coincided with solid inflows into products tracking the sector such as ETFs; hedge fund positioning is also historically high.”

There are tech ETFs across a number of different investment styles, says Arian Neiron, managing director, head of VanEck Asia Pacific.

“There are ETFs with smart beta approaches that factor in the quality of the company. Others are market-capitalisation based, which weight a company based on its size. There is also a range of active exchange-traded products invested in technology stocks in developed and emerging markets,” he says.

Neiron notes technology is well represented in the broad-based international equity benchmark MSCI World ex Australia index, with a weighting of about 19 per cent.

“Buying a market capitalisation index gives investors tech exposure and there are a number of these ETFs from a broad range of issuers.”

The VanEck Vectors MSCI World ex Australia Quality ETF has about a 39 per cent exposure to US technology stocks and returned 18.2 per cent over the year to June 30, easily outperforming the ASX/S&P 200 over the same period.

P/E ratios extremely high

Neiron suggests investors need to be cautious of ETFs that claim to have a pure technology exposure. For example, investors in ETFs that track the NASDAQ 100 index may not realise it covers several sectors, of which technology is just one.

Other sectors represented in the NASDAQ 100 range from basic materials, consumer staples to construction, with IT being only 61 per cent of the index. Nevertheless, he says a strong case remains for investors having an exposure to tech through ETFs.

“The technology sector has been high growth and is contributing to momentum in offshore markets and economies. While current valuations in the technology sector are high, they are not as high as they were during the dotcom bubble in 2000.”

However, price-to-earnings ratios on some technology stocks are exceptionally high. Neiron notes Amazon traded at a P/E ratio of about 373.6 in 2017. Netflix traded at a P/E ratio of 312.4 across the same period. “But these concerns are not true of all technology and internet stocks. Quality shares such as Apple, for example, traded at a relatively modest 20 times earnings in 2017, while Alphabet traded at 33.8 times earnings and Facebook at 31.3 times earnings.”

He says while the tech space continues to be a desirable investment opportunity, it is prudent to separate tech stocks that can withstand downturns from poorer quality stocks, or those that may tumble if the sharemarket corrects.

“One way to do this is to look for stocks exhibiting quality factors; that is, those with high return-on-equity, low leverage and consistent earnings.”

Julia Lee, Bell Direct equities analyst, notes the make-up of tech ETFs impacts performance and it is important to understand the underlying investments that drive the performance of the ETF.

“There are many different tech ETFs and even in the tech category there are many angles and themes to which investors can tilt their portfolio.”

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