Big global tech stocks have continued their strong run, with some tech stock indexes up by close to 40 per cent so far this year.
But with so many asset managers advising caution about the outlook for equity markets, investors are asking whether they can maintain exposure to tech stocks and be protected from the worst of any big sell-off.
ETF Securities co-head of sales, Kanish Chugh, argues it is possible using a smart beta strategy.
The ETFS Morningstar Global Technology ETF gives investors access to a portfolio of global tech stocks by tracking the Morningstar Developed Markets Technology Mast Focus Index.
Currently, the fund’s biggest holdings include Guidewire Software, Microsoft, Alphabest, Broadcom, Arrow Electronics, Adobe, Palo Alto Networks, Facebook, ServiceNow and Microchip Technology.
The Morningstar benchmark is a smart beta index, setting some additional hurdles for inclusion in the index and subject to regular review.
To be considered for inclusion companies must have a “wide or narrow moat rating”, which means they have a competitive advantage that can be maintained to a greater or lesser degree.
Morningstar also filters companies according its estimate of their fair value. If their stock prices are too far above fair value, they don’t make it into the portfolio.
Chugh says: “It is a deeper level of analysis systematised in an index. It gives exposure to the best ideas in tech, not just the biggest companies in the sector.”
The fund has returned 33.4 per cent over the 12 months to the end of November and 39.7 per cent year-to-date.
The Morningstar index the fund mirrors has produced an average return of 21.2 per cent a year over the past 10 years and 27.7 per cent a year over the past three years.
Importantly, the fund displayed some defensive characteristics during the December quarter last year, when there was a big equity market sell-off.
It fell 11.4 per cent in the three months to the end of December, while the Nasdaq 100 Index was down 14.6 per cent.
The fund currently has 30 stocks. It can hold between 25 and 50. Most of them are US stocks but some are listed in other markets.
“It is a best of breed fund. It is fair to say that valuations are high but the index we are using does not just take a market cap view of the sector. It screens out stocks with very high valuations,” Chugh says.