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The ETFs cashing in on the Tech boom

ETF Watch - Jun 01, 2017

Amazon has been making headlines lately. With announcements that they are moving into the Australian market, many have called for the death of Australian retailers and just this week Amazon shares hit US $1,000, making founder Jeff Bezos the second richest person in the world. All for a company that started its life selling books and is yet to turn a profit. 

Its not just Amazon; Apple, Microsoft, Facebook and Alphabet (Google) are all in the top 10 companies in the US based S&P500 index, companies that apart from Microsoft did not exist 20 years ago, are now household names and among the biggest companies in the world. Given technology is so ingrained in our lives these days, the opportunities for Australian investors in this space are extremely limited. When we looked at equal weight ETFs, our analysis showed that Technology companies make up only 1% of Australia’s flagship S&P/ASX200 index, yet they now account for 20% of the S&P500 and is the largest sector in the US share market.

Thankfully for investors seeking exposure to this sector, there’s now some ETFs available on the ASX that specifically target Tech stocks. We take a look below.

Betashares NASDAQ 100 ETF – NDQ

The NASDAQ index is a household name, and is usually associated with its focus on tech companies. Here’s a brief history lesson of the NASDAQ. The NASDAQ is an alternate exchange to the New York Stock Exchange (NYSE) and was launched in 1971. The exchange was a pioneer in electronic trading, which whilst is considered the norm these days, was revolutionary almost 50 years ago. Because of this it appealed to technology companies, who when they chose to list on the sharemarket, chose the NASDAQ as their exchange of choice. This gave the NASDAQ a reputation as being the exchange of choice for technology companies and as a self-fulfilling prophecy the NASDAQ morphed into a technology focused exchange.

Today the NASDAQ exchange includes all the household names mentioned above, as well as plenty of others like Netflix, Paypal, Yahoo, eBay, Cisco and Tesla. However, whilst the NASDAQ is tech heavy, technology ‘only’ makes up around 53% of the NASDAQ 100 index, with consumer services and health companies also fairly heavily represented, although some companies considered consumer services such as Netflix could be argued as being technology. Lovers of bad coffee can also access Starbucks through the NASDAQ exchange. Apple, Amazon, Facebook, Microsoft and Google make up around 42% of the index. Like Australia’s concentration to the big 4 banks, the fortunes of the NASDAQ are heavily tied to the big 5 tech companies. The NASDAQ 100 does not include any financial stocks.

The NASDAQ 100 doesn’t include all the big US tech companies. Some have chosen to list on the NYSE. This includes names like IBM, LinkedIn, Pandora and Nokia. Whilst the article is a few years old now, it seems the NYSE is fighting back and winning more tech IPOs these days, meaning investors in the NASDAQ 100 may not be getting all the tech exposure they might want.

Betashares NASDAQ 100 ETF (NDQ) was launched in May 2015 and now manages $104m in funds.  Management costs are 0.38% pa and the fund is domiciled in Australia. This is the lowest cost tech focused ETF available in Australia based on its headline Management Cost, however once estimated expense recovery fees of 0.10% pa are added back in, becomes the most expensive.

ETFS Morningstar Global Technology ETF – TECH

We wrote about Smart Beta ETFs some time back, and have seen an explosion in Smart Beta ETFs since. The recently launched ETFS Morningstar Global Technology ETF (TECH) is the latest to overcome some of the limitations of investing in traditional market capitalisation weighted indexes.

This fund tracks the Morningstar Developed Markets Technology Moat Focus Index. Morningstar have developed a range of ‘moat’ indexes, in which companies with a wide moat possess structural competitive advantages which allow them to earn above average returns over the long term and mean the companies can stave off competition for longer than a company without a moat. Morningstar analysts determine if a company has a wide, narrow or no moat based on the company attributes, after which the 25 wide or narrow moat stocks that are cheapest based on Morningstar’s assessment and have a tech focus are included in the index. The 25 companies are roughly equally weighted in the index and the maximum weighting to an individual country is 40% or 10 percentage points beyond its corresponding weight in the Morningstar Developed Markets Technology Index. As the US dominates tech, exposure to the US is well over 40%.

Amongst the top 10 holdings of the index are Facebook, Apple and Alphabet, as well as Adobe and Australia’s REA Group (realestate.com.au). Investors looking for a broader exposure outside of the US may be disappointed. With its domination of tech globally, the fund is made up of around 84% US companies, and 7 of the top 10 companies are part of the NASDAQ.

TECH was only launched in Aprlil 2017, and as a result currently only has just over $5.5m funds under management. The fund is domiciled locally and has management costs of 0.45% pa.

There's also some more niche options

For those looking for something a little more niche Betashares Global Cybersecurity ETF (HACK) has a security technology focus, and there are two Listed Investment Companies which focus on investment in early stage technology companies, these being Bailador Technology Investments Limited (BTI) and Thorney Technologies LTD (TEK).

This analysis presents factual information only and should not be considered investment advice. We recommend investors seek professional advice before investing in any of the funds mentioned.

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