Continuing from the previous article, we look at different segments of the Information and Technology (ICT) Sector and highlight some examples of ETF's that provide exposure to these segments.
A semiconductor industry focussed ETF is the iShares PHLX Semiconductor ETF (symbol: SOXX), that tracks the PHLX Semiconductor Sector Index composed of U.S. equities in the semiconductor sector. Net assets as on Nov 20, 2020 were US$3.61 billion and top ten holdings, which make up around 60% of total assets, include most of the big players such as Qualcomm, Texas Instruments, Broadcom, NVIDIA, Intel among others.
Another popular semiconductor ETF is the VanEck Vectors Semiconductor ETF (symbol: SMH), with net assets of US$2.75 billion. This ETF tracks the MVISÂ(r) US Listed Semiconductor 25 Index and is also blue-chip heavy with top 10 holdings making up just over 58% of total assets and has big weights in TSMC, NVIDIA, Qualcomm, Intel Corp and Texas Instruments, Broadcom, ASML and others. The combined market capitalisation of the top ten companies in this ETF is about US$1.77 trillion, capturing a big chunk of the market of this important segment of technology sector.
A relatively smaller but broad-based telecom segment ETF is the First Trust IndXX NextG ETF (symbol: NXTG) with net assets of US$616 million. Its top ten holding constitute just under 20% of total assets indicating its broad base and include such names as Xiaomi, Infosys, Wipro, TSMC, Qualcomm, HCL and NVIDIA.
With 5G beginning to roll-out and likely to move centre stage in the communication technology space over the coming few years, there could be investment opportunities in companies focussed on this space. Defiance 5G Next Gen Connectivity ETF (symbol: FIVG) provides an exposure to companies which are closely linked to the development of 5G networking and communication technologies. The fund has net assets of circa US$550 million and its top ten holdings account for about 41% of total assets. Top ten holdings include Qualcomm, NXP Semiconductors NV, Ericsson, Analog Devices, Xilinx, Verizon, Charter Communic-ations, among others.
Cyber security has become a major growth area in technology and it is worthwhile to be aware of investment opportunities in this space. An ETF providing exposure to this sub-segment is the First Trust NASDAQ Cybersecurity ETF (symbol: CIBR) with net assets of US$2.1 billion. The top ten holdings comprise about 47.5% of total assets and include Okta Inc., Crowd Strike, Zscaler, Cisco, Cloudfare and FS Networks.
The software segment is both vast and diverse. There are smaller ETF's focussed on specific types of software but their small size usually implies lower liquidity, higher volatility and greater spreads between bid and offer prices of the fund. In view of this, for investors getting started in
technology investing, it may be better to stick to larger and more well-established ETFs in order to obtain exposure to the software segment. One example can be the iShares Expanded Tech-Software Sector ETF (symbol: IGV) with net assets of over US$5.0 billion. Top ten holdings constitute 55% of total assets and include the big players in application and enterprise software, operating and infrastructure software such as Microsoft, Adobe, Salesforce.com, Oracle Corp, ServiceNow, Zoom Video Communications, Intuit, Activision Blizzard, Autodesk, DocuSign.
As discussed in earlier articles in this series, cloud computing is one of the fastest growing sub-segments of the technology sector and Covid-19 pandemic has accelerated transition to the 'Cloud' in the form of Software-as-a-Service (SaaS) and Infrastructure as a Service (IaaS). So it is useful to know what investment opportunities this sub-segment offers.
First Trust Cloud Computing ETF (symbol: SKYY) provides exposure to the biggest players in the 'Cloud' space and has net assets of US$4.8 billion. Its top ten holdings account for around 37% of total assets so it is not very concentrated in few companies. The top ten holdings include major players like Alibaba Group Holding, Oracle Corp, Alphabet (Google), Amazon.com, Microsoft and VMware.
Another interesting ETF providing exposure to cloud computing is the Global X Cloud Computing ETF Global X Cloud Computing ETF (symbol: CLOU) that tracks Indxx Global Cloud Computing Index with net assets of US$1.2 billion. Its top ten holdings are more concentrated accounting for over 53% of total assets but provide exposure beyond the biggest players noted above. The top ten holdings include Zoom,Twilio, Zscaler, Paylocity, Shopify, Salesforce.com among others.
Robotics and Artificial Intelligence
Robotics and Artificial Intelligence are the next frontiers of information technology that are just getting traction. While there is much hype about this sub-segment of the technology sector, there are also companies with demonstrated track record in this field. The following two ETFs are examples of capturing investment opportunities in this space.
Robo Global Robotics and Automation Index ETF (symbol: ROBO) provides a broad-based exposure to the robotics industry and has net assets of about US$ 1.3 billion. It's top holdings constitute only 17.25% of total assets and include companies like Harmonic Drive Systems, Vocera Communications, Daifuku Co., Fanuc Corp and iRobot Corp. to name a few.
Another ETF in this space is Global X Robotics & Artificial Intelligence ETF (symbol: BOTZ), with net assets of US$1.8 billion. Its top ten holdings are more concentrated in big players in this space and account for over 64% of total assets, with names such as NVIDIA, Fanuc Corp, Intuitive Surgical, ABB Ltd, Keyence Corp, Renishaw PLC, YASKAWA Electric, etc.
Consumer Electronic Entertainment [Gaming]
With the Covid-19 keeping so many people at home, it is no wonder that electronic games companies are seeing their product sales rise rapidly. VanEck Vectors Video Gaming and eSports ETF (symbol: ESPO) in an example of one fund providing exposure to this space. It should be noted that this sub-segment can be highly volatile, ebbing and flowing with consumers' interest and successful (or otherwise) launch of new games. This ETF has net assets of US$558 million and its top ten holdings account for over 61% of total assets of the fund. These include relatively large positions in companies such as Tencent Holdings, NVIDIA, Sea Ltd., Nintendo Co Ltd, BANDAI NAMCO, NEXON Co Ltd and Activision Blizzard.
With Internet at the centre of communications technology now, there is likelihood of attractive investment opportunities in this sub-segment of technology sector well into the future. An ETF that provides exposure to Internet based businesses is the First Trust Dow Jones Internet Index Fund (FDN) which tracks the Dow Jones Internet Composite Index (SM). Its net assets are US$9.86 billion and the top ten holdings constitute over 51% of total assets. These top ten holdings include many of the biggest companies driven by the Internet such as Amazon, Facebook, PayPal, Netflix, Salesforce.com, Zoom, Alphabet (Google), Snap, etc.
Next Generation Technology
While we have provided examples of investment opportunities in many of the key information technology businesses with successful business models, there is another chapter in technology that should not be ignored. This is related to emerging technologies which are highly likely to take centre stage in our lives in the not-too-distant future and disrupt today's established industries. Just think of electric cars and electronic payment platforms. They have shown themselves as businesses that can no longer be ignored. For the lay person it is often hard to conduct meaningful research on the success probability of such businesses. It may be useful to participate in such opportunities via ETFs if we have the risk appetite. One such example is ARK Innovation ETF (symbol: ARKK) with net assets of over US$9.6 billion. Its top ten holdings constitute 52% of the fund's assets and include the following emerging technologies companies:
=================================================================================== Name Mkt Cap. (US$ bn) Technology Segment =================================================================================== Tesla 464 Electric Vehicles & Battery Systems Square Inc 88.4 Payment & Point-of-Sale Solutions Roku 33.4 TV Streaming Platform Teledoc Health 29 Virtual Healthcare Zillow Group 26.1 Real Estate transactions e-platform Invitae Corp 8.4 Medical Genetics Testing CRISPR Therapeutics AG 7.75 Gene Editing Protolabs 3.59 3-D Printing Equipment Lending Tree 3.54 Online Mortgage & Consumer Lending 2U Inc. 2.5 Online Education Technology =================================================================================== Source: Yahoo Finance; data as of November 20, 2020 ===================================================================================
China and Emerging Markets
No discussion about technology can be complete without highlighting the growing importance of China which, in a short span of a decade, has become a technology behemoth. Going forward, Chinese technology companies have tremendous potential to continue growing robustly and provide healthy returns to investors albeit with somewhat higher degree of volatility. Thus it is worthwhile to keep an eye on the technology scene in China. One way to do that is, for example, to look at Invesco China Technology ETF (symbol: CQQQ) that tracks the FTSE China Incl A 25% Technology Capped Index. With Net Assets of over US$1.0 billion the top ten holdings make up over 60% of total assets. These include, Tencent Holdings, Meituan, Baidu, Semiconductor Manufacturing International Corp., Sunny Optical Technology (Group), GDS Holdings Ltd, Kingdee International Software, Autohome, JOYY, Tencent Music Entertainment.
Another way to gain exposure to China as well as some emerging market Internet driven technology companies can be through EMQQ The Emerging Markets Internet & Ecommerce ETF (symbol: EMQQ). This ETF tracks the propriety EMQQ Index that focuses on investable universe of publicly traded, emerging market Internet and e-commerce companies. Net assets of the fund are US$1.1 billion and top ten holdings which make up 62% of total assets are:
=============================================================================================================== Name Mkt Cap (US$ bn) Technology Segment =============================================================================================================== Meituan (China) 233.0 E-Commerce platform for food delivery, hotel & travel booking, payment s & micro loan, car-hailing service Ali Baba Group (China) 707.8 Multiple digital products and services Tencent Holdings (China) 708.7 FinTech and Business Services, Online Advertising, Gaming Naspers Ltd (South Africa) 5.6 E-Classifieds Ads, food delivery, e-payments and fintech, education, health, and e-commerce & publications MercadoLibre (Argentina) 17.4 E-commerce, e-payments, e-lending Pinduoduo (China) 171.7 E-commerce and online shopping JD.com (China) 134.7 E-commerce and online shopping NAVER Corp (S. Korea) 35.9 South Korea's largest web engine Prosus NV (Netherlands) 148.6 E-commerce and Internet businesses, e-payments and Internet platforms in Central & E. Europe, Americas, Americas & Asia Baidu Inc. (China) 45.4 Host of Apps and e-services =============================================================================================================== Source: Yahoo Finance; data as of November 20, 2020 ===============================================================================================================
Some readers may be thinking that it's all very well to be thinking about investing in technology stocks but isn't the timing a bit off. After a stellar two-year run, isn't the technology sector overbought and valuations appear to be at record high for many tech stocks across the entire sector. Already, with positive signs of successful Covid-19 vaccine, there is beginning to be rotation out of technology and into cyclical sectors. Such concerns have some validity. However, it should be remembered that investing is a continuing process and not a one-shot game. As noted in the beginning of this article, interested investors need to understand what cyclical factors are and what are longer term secular trends. In this context, investment focus should be on the sub-segments that display clear secular growth outlook. Within these, there are leading companies with strong market position and financials plus successful innovation history which gives them staying power through economic and industry cycles and thus the ability to grow their sales and profits faster than the market. This would then provide better returns than market indexes.
(The writer is the former Managing Director of Pakistan Stock Exchange and President & CEO of Capital Markets International Advisors, a Toronto, Canada based consultancy. The companies noted in this article, according to the writer, are for information purposes only and used simply as examples. This is not a solicitation to buy or sell any security or company mentioned herein. Except for a small investment (US$4,000/=) in an ETF (IYW), the writer claims he does not own stock in companies noted herein. Forward-looking statements should not be considered as guarantees or predictions of future events. Data provided in the article is from publicly available third-party sources, however its accuracy is not guaranteed and the data should be treated merely as indicative. Anyone interested in finding about investment opportunities should conduct their own research and due diligence within the guidelines of their respective jurisdictions and through authorised investment professionals. Potential interested readers should note that past performance is no assurance of future performance of an investment and the value of any investment may become worth more or less than the original invested amount.
Copyright Business Recorder, 2020