The Nasdaq is not the only way to play the sector
Thursday 19 May 2022 Author: Steven Frazer

What if global stock markets are close to bottoming? What if economies around the world largely avoid recession, with inflation becalmed without excessive tightening of monetary policy by central banks? If so, tech could come roaring back.

A rose-tinted prospect perhaps, yet it is not inconceivable that rising benchmark bond yields, central bank’s tightening of monetary policy and soaring inflation are priced in after the valuations adjustment this year. The S&P 500, for example, has reversed 18%, while the Nasdaq Composite is 30% off its November 2021 highs.

‘In our view, the technology sector continues to benefit from strong tailwinds which, we believe, should continue to drive attractive long-term appreciation,’ said Walter Price, manager of the Allianz Technology Trust (ATT).

‘We continue to believe the technology sector can provide some of the best absolute and relative return opportunities in the equity markets – especially for bottom-up stock pickers.’

‘Despite the economic uncertainty, the secular tailwinds supporting most of our core themes remain strong, particularly in areas such as cybersecurity, clean tech/electric vehicles, 5G networks/devices, data centre capex and artificial intelligence/machine learning, with spend intentions in some of these areas potentially strengthened by events in Ukraine,’ said Ben Rogoff of the Polar Capital Technology Trust (PCT) in his most recent commentary.

SOLVING THE WORLD’S GREAT PROBLEMS

We are relying on technology to solve many of the world’s biggest problems; climate change, how we feed and power the world in the years to come, and medical breakthroughs that will allow future generations to live longer, happier lives.

‘I did not think that climate change would happen in my lifetime, but it already is, and I believe with technology we can make advancements before it’s too late,’ says Shirish Nadkarni, an entrepreneur and author who started his career as a software engineer at Microsoft (MSFT:NASDAQ).

David Bishop, a technology consultant and researcher who has worked with companies such as AT&T (T:NYSE), Delta Airlines (DAL:NYSE) and Toshiba (6502:TYO), believes that technology has the scope to eventually provide solutions to world hunger.

‘Hunger, while it seems like a very simple thing off the cuff, has such a great impact long-term on communities.’

Investors willing to look beyond immediate market challenges and back these long-run technology themes can choose from many low- cost ETFs.

The Invesco EQQQ NASDAQ-100 UCITS ETF (EQQQ) tracks the performance of the 100 biggest companies of the tech-heavy Nasdaq Composite. Yet Nasdaq is not exclusively tech; you may not be aware that companies including PepsiCo (PEP:NASDAQ), Costco (COST:NASDAQ) and Starbucks (SBUX:NASDAQ) are listed on Nasdaq, and these are hardly tech names.

Investors have far more granular options available to them, if they’re willing to accept the increased risk, allowing them to gain exposure to a group of tech stocks or themes without buying individual stocks.

For example, Xtrackers MSCI World Information Technology ETF (XDWT) tracks a custom index tech stocks from developed markets, including Apple (AAPL:NASDAQ), Nvidia (NVDA:NASDAQ) and Mastercard (MA:NYSE). It has performed well, generating a 78.2% performance over three years from largely US-listed equities.



BEYOND MAINSTREAM US TECH

US tech is so dominant that tech from elsewhere is often overlooked. The iShares MSCI Europe Information Technology Sector ETF (ESIT) provides one solution to this bias by tracking an index of large and mid-sized European tech firms, such microchip kit supplier ASML (ASML:AMS), German software giant SAP (SAP:ETR) and Amadeus (BME:AMS), the Dutch travel booking software company.

The £27 million Invesco MSCI China Technology All Shares Stock Connect ETF (MCTS) does something similar with Chinese technology companies, albeit a pretty tough place to be an investor recently with many Chinese tech firms coming under ever greater regulatory scrutiny.

There are also several technology thematic ETFs, focusing on things like the future of food, cloud computing, cutting edge medical research, fintech and electric vehicles.



Investors do need to tread carefully, however. Many of these ETFs were born during the glut of new launches in recent years and have a limited track record. And the more concentrated the investment strategy, the more volatile an ETF is likely to be, so investors must be willing to accept the likelihood of frequent peaks and troughs.

Another issue is fund size. Of the 22 tech ETFs on our list, nine have less than £50 million of assets under management. That poses the risk of the ETFs being shut down unless they attract significantly more assets.

Disclaimer: The author owns shares in Allianz Technology Trust and Polar Capital Technology Trust


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