Using ETFs to access the global tech boom

Last week, the ASX released its annual investor study which revealed that 35 per cent of Australian adults, 6.6 million people, hold listed investments outside super. Almost a quarter of them began investing in the last two years.

This influx of new investors has produced some interesting trends, particularly among young investors.

The ‘next generation’ (ages 18-24) have a strong appetite for exchange traded funds (ETFs), with 20 per cent already owning an ETF and 45 per cent planning to invest in an ETF in the next 12 months.

As a 25-year-old, I am a case study of one: my first investments were in ETFs and it’s a pattern I’m seeing among my peers too.

On the surface, the growing popularity of ETFs stems from being a low-cost vehicle to invest in a particular index while offering diversification across a number of companies.

Australian ETF provider BetaShares, has seen its assets under management increase by over $7 billion in the past year and its CEO Alex Vynokur believes it’s more than just the influx of new investors driving this growth.

“I think what’s also happening is that Australian investors are starting to tap ETFs more and more as a way of obtaining exposure to growth sectors and of course, technology is a key growth sector,” he told Eureka Report.

This is occurring through a number of ETFs listed on the ASX which are focused on technology stocks in Australia and globally.

Breaking it down

BetaShares and ETF Securities are two of the main providers of ASX-listed tech ETFs.

Each ETF they offer is different in terms of its holdings, how holdings are weighted and how often they are rebalanced, so before we get to a comparison, I’ve listed a few things to look out for.

Weighting

An ETF’s holdings are usually weighted using either an equal weight or market weight method.

Equal weight means at the time of rebalancing, each stock holds the same proportion of the portfolio regardless of its size. For example, CSL and Coles would both have the same weight even though CSL’s market cap is five times that of Coles.

The benefit of equal weighting is it offers protection if a certain company experiences a downturn. The logic is to instil a process of selling high and buying low by selling stocks that are being overbought and buying stocks that are oversold.

It also means you buy proportionally more of smaller companies, which can give the portfolio more growth while making it theoretically riskier.

Market weight means at the time of rebalancing, each stock contributes to the ETF’s performance based on the size of its market capitalisation. For example, CSL would have a heavier weighting than Coles as its market cap is larger.

The benefit of market weighting is it steadily reduces an ETFs exposure to declining companies while increasing exposure to stocks that are growing and performing well.

The risk, however, is if a stock is overvalued then it will automatically become a larger portion of an ETF.

As you’ll see below, market-weighted ETFs often have a limit on how much one particular holding weighs, so it’s not overexposed to a single company.

Rebalancing

Rebalancing involves resetting the weighting of an ETF’s holdings back to its target weighting.

This is important because in between scheduled rebalancing dates (which could be annually, every half or quarterly), the weight of an ETF’s holdings will fluctuate in parallel with how that particular stock is performing on the market.

Let’s use a market-weight ETF as an example. Let’s say it holds Afterpay at 20 per cent and Xero at 8 per cent, is rebalanced quarterly and has a weighting limit of 25 per cent.

If Afterpay has an exceptional quarter, its market cap may grow beyond that 25 per cent limit and would therefore need to be rebalanced back to 25 per cent, with the excess being spread out among other holdings.

Aussie tech sector’s time to shine

Throughout COVID, the tech sector has provided investors with a trove of returns both on the ASX and also overseas share markets.

The relatively new S&P/ASX All Technology Index’s (All Tech) share price has grown 25 per cent to date (at time of writing) compared to the ASX200’s -12.7 per cent decline over the same period.

Having launched on February 24 this year, the All Tech Index was designed as Australia’s version of the Nasdaq, giving investors access to 50 of the ASX’s leading and emerging technology companies.

As the graph below indicates, the All Tech’s market capitalisation has been growing at a faster rate than the Nasdaq for some time and since the initial blow of the COVID market crash in March, All Tech’s market cap is now growing faster than ever.

Source: ASX AllTech infographic

And while the Nasdaq has received plenty of attention recently for repeatedly breaking its all-time highs, Vynokur believes Australia’s tech sector is a little unloved.

“In order for Australia to thrive and prosper into the future, we need to diversify sources of revenue and growth, and innovation has been at the core of the agenda for both governments and corporations – so investment in innovation, technology and fostering entrepreneurship is really at the core of where Australia is heading,” he said.

“I think with that proposition, it became pretty clear to us that there is a tremendous and fast-growing technology sector that we have in Australia, which has really been flying under the radar of Australian investors.”

It led to BetaShares launching the first and only Australian technology ETF (ASX: ATEC), which tracks the performance of the All Tech Index while offering the usual ETF benefits of diversification and low fees of 0.48 per cent per annum.

Vynokur describes the long-term returns of ATEC in comparison to the ASX200 as “quite staggering,” and it’s hard to disagree.

“The outperformance of ATEC relative to the ASX 200 over the last 12 months is 27 per cent, over three years is 18.3 per cent and over five years is 12.6 per cent,” he explained.

“I think what's really important here is to not just focus on the exceptional performance this year, but long term, we're seeing that technology and innovation is not only a great thematic… but it's also a really attractive investment opportunity for Australian investors.”

BetaShares uses a market capitalisation approach for the weighting of ATEC’s holdings with a 25 per cent cap on the maximum weight of a stock.

It means the weight of ATEC’s top holding – Afterpay – has increased over the past six months as its market value soared, to the point where it now makes up 20 per cent of ATEC.

ATEC’s second largest holding, Xero, has a weighting of 10.8 per cent, or just over half of Afterpay’s, while Seek, Computershare and REA Group round out ATEC’s top five holdings by weight.

Other ATEC holdings include a mix of stocks from the Information Technology, Communication Services, Consumer Discretionary and Healthcare sectors. A full list of the ETF’s holdings can be found here.

Returns are as follows:

Source: BetaShares ATEC factsheet

Riding the Nasdaq rally

Nothing portrays the COVID tech rally better than the performance of the Nasdaq, which even this week, continued to break through record highs.

Year to date, the Nasdaq Composite Index’s share price has grown just under 30 per cent and as most investors are aware, this has been largely driven by the performance of tech behemoths Facebook, Amazon, Apple, Google (Alphabet) and Netflix.

While choosing an ETF to leverage Australia’s tech stocks is simple, given there’s only one, tapping into US tech stocks through an ASX-listed ETF isn’t as easy given there are a few on offer.

Below is a comparison of some popular ASX-listed ETFs that focus on US tech stocks.

1. ETF Securities FANG (ASX: FANG)

FANG began trading on the ASX in March this year and tracks the performance of the New York Stock Exchange FANG Index, providing exposure to 10 of the highly traded tech giants.

Its holdings are equal weighted and as of July 31, its top five holdings are Tesla, NVIDIA Corp, Alibaba, Amazon and Apple.

The index committee rebalances FANG every quarter and its share price has grown 48.5 per cent year to date. The management fee is 0.35 per cent per annum.

Returns are below:

Source: ETFS FANG factsheet

2. BetaShares Nasdaq 100 ETF (ASX: NDQ)

NDQ tracks the performance of the Nasdaq-100 Index which comprises 100 of the largest non-financial companies listed on the Nasdaq market – companies at the forefront of the ‘new economy’.

Holdings are weighted by market capitalisation and the top five holdings as of August 31 are Apple, Amazon, Microsoft, Facebook and Tesla.

Rebalancing of NDQ occurs every quarter and its share price has grown 28.1 per cent year to date. The management fee is 0.48 per cent per annum.

Returns are below:

Source: BetaShares NDQ factsheet

3. ETF Securities Morningstar Global Technology ETF (ASX: TECH)

TECH tracks the performance of the Morningstar Developed Markets Technology Moat Focus Index and offers exposure to tech companies that Morningstar’s global equity analyst team view as being attractively priced.

It gives access to technology companies in areas such as software, semi-conductors, data processing, computer equipment and data bases.

Companies in TECH are equally weighted however TECH is comprised of two sub-portfolios, with each sub-portfolio rebalanced alternately each quarter. The total number of stocks in the portfolio depends on whether companies appear in both sub-portfolios – so there will be a minimum of 25 stocks if the sub-portfolios are identical and a maximum of 50 if no companies appear in both sub-portfolios.

As of July 31, TECH has 34 holdings and its top holdings are Infineon Technologies, Splunk Inc, NICE Ltd, Broadcom Inc and STMicroelectronics NV.

The maximum weight a single country has is the greater of 40 per cent and 10 per cent. This will fluctuate between rebalancing, similar to the holdings, and as of July 31, there is a 76.7 per cent allocation towards the US given the growth of holdings like Microsoft. For this reason, I’ve put it under the ‘US section’.

TECH has a management fee of 0.45 per cent per annum and its share price has grown 4.8 per cent year to date.

Returns are below:

Source: TECH factsheet

Going global

Beyond the US and Australia, there are growing tech markets that Vynokur also believes are flying under the radar to Australian investors.

One of those is the Asian market which BetaShares has seen increased interest for with its Asia Tech Tigers ETF which currently boasts $250 million in assets under management.

“We're finding that an increasing number of Asian technology leaders have actually emerged into significant global players and that's really exciting from an investor's perspective,” Vynokur said.

“Asia is benefiting from the growing middle class and rising middle class. More and more citizens of China, Indonesia, Malaysia and the Philippines are earning more than they ever have in the past.

“The average earnings are translating into greater spending power and ultimately that's quite an exciting story and opportunity for Australian investors.”

1. BetaShares Asia Technology Tigers ETF (ASX: ASIA)

ASIA tracks the performance of the Solactive Asia Ex-Japan Technology & Internet Tigers Index comprising the 50 largest tech and online retail stocks in Asia (except for Japan).

Its holdings are weighted by market capitalisation and there is a cap of 10 per cent for any single security. As of August 31, its top five holding are in Meituan Dianping, Taiwan Semiconductor Manufactu, Alibaba Group, Tencent Holdings and Samsung Electronics.

As of July 31, ASIA’s largest country allocation is to China at 54.4 per cent followed by Taiwan at 22.7 per cent and South Korea at 16.5 per cent.

Rebalancing occurs twice a year and ASIA’s share price has grown 33.9 per cent year to date. Management fees are 0.67 per cent per annum. 

Returns are below:

Source: ASIA factsheet

2. BetaShares Global Robotics and AI ETF (ASX: RBTZ)

RBTZ tracks the performance of the Index Global Robotics & Artificial Intelligence Thematic Index and offers exposure to companies involved in industrial robotics and automation, non-industrial robots, artificial intelligence and unmanned vehicles and drones.

Holdings are equal weighted and rebalanced annually. The top five holdings as of August 31 are Nvidia Corp, Intuitive Surgical, ABB, Keyence Corp and Fanuc Corp.

RBTZ offers exposure to numerous countries around the world. As of July 31, Japan had the biggest allocation of 42.2 per cent, followed by the US at 35.2 per cent and Switzerland at 13.6 per cent.

The RBTZ share price has grown 12 per cent year to date and the management fee is 0.57 per cent per annum.

Returns are below:

Source: RBTZ factsheet 

Wrap up

With technology markets across the world booming during COVID, the ASX offers a number of opportunities for investors to gain exposure through ETFs to different tech markets.

As mentioned earlier, it’s important to look at how an ETF’s holdings are weighted, how often it’s rebalanced and of course, what the holdings actually are.

These will all determine the level of risk involved with investing, but by design, ETFs naturally offer diversification and therefore aren’t as risky as picking individual tech stocks.

The old cliché of past performance isn’t an indicator of future performance is applicable and while some of the ETFs discussed in this article are relatively new, some weight should be given to the longer-term performance of those ETFs that have been around for a number of years.

Note: The ETFs mentioned may be subject to other fees not mentioned in this article.