Technology isn’t going away

by , 23rd October 2018

Technology shares have had a serious wobble over the last month. At one point Amazon was down 12% since the end of September whilst Facebook and Alphabet were down 10%. There has been some retracement since those lows, but these are still nervous times for investors.

So does this mean it’s time to sell out completely from technology?

Well, let’s look at the valuations of a few well known tech names – the FAANGs.

Stock Price/earnings ratio
Alphabet 48
Amazon 140
Apple 20
Facebook 23
Netflix 118

At first glance, Amazon and Netflix, look very expensive while Alphabet is pricey too. But you could at least argue that Facebook and Apple are cheap given their strong position in their respective markets. Of course, price/earnings ratios don’t tell you anything like the full story, but the point I’m making is that the technology sector doesn’t seem uniformly overvalued at the moment.

What’s more, the internet and other new technologies are disrupting more and more areas of the economy, so if you avoid technology completely due to valuation concerns, you risk missing out on a big chunk of future economic growth. Your old economy holdings may be disrupted away by newer, more flexible rivals.

Remember also that the tech sector is much more than just the FAANG stocks. There are plenty of other tech stocks out there to consider. In fact we shouldn’t see it as a single sector.

To be clear, I wouldn’t go crazy and be massively overweight in pure tech stocks. But I think it would be equally foolish to avoid the sector altogether. As I said, technology is becoming ever more important, and there are no guarantees that technology share prices will ever fall from where they are now. Big falls could well happen, but they’re far from certain, and you could end up waiting a very long time for the long-awaited share price falls to come.

It’s a question of balance, which is why I own some tech stocks and ETFs, but don’t have too much.

And then on top of the pure tech stocks, I’m keen to invest in businesses that aren’t seen as traditional tech stocks but are using technology effectively to adapt and grow.

As Howie Li of Legal & General Investment Management told me in the latest Big Call radio show:

‘Technology shouldn’t just be seen as a single sector…technology should also be looked at in how it’s affecting other sectors as well.’

The ETF angle

Over the last couple of years, we’ve seen a sizeable crop of new technology ETFs launch in Europe. You could argue that the proliferation of new technology ETFs is a warning sign that the tech market is near its top. But some of the products are quite innovative and they make it easier for you to broaden out from the FAANGs. So they’re worth looking at in a bit more depth. I’m going to look at five in particular.

  1. L&G Battery Value-Chain UCITS (BATT)

As we make the switch to electric cars, the demand for cheaper, more efficient batteries is going to carry on rising. Better batteries are also crucial as we use more renewable energy on the grid.

This ETF was launched this year and it invests in a wide range of different companies connected to batteries. That includes Samsung which has ‘a huge amount of projects in batteries’, according to Li. Samsung’s technology is being used in the BMW i3 electric car. Sony and Toshiba are also in the ETF as well as well as several Lithium mining companies.

The ETF may ‘feel’ like an active fund to some investors, but strictly speaking, it’s a passive fund. It tracks the Solactive Battery Value chain index. To select energy storage companies, the index uses data from the DOE Global Energy Storage Database, for the mining companies, data comes from Metal Bulletin.

It’s a pretty concentrated ETF with just 28 holdings and interestingly, 42% of the fund is invested in Japan.

Top five holdings

Stock % of ETF
Samsung SDI 5.0
Sony 4.7
Toshiba 4.5
EnerSyS 4.2
NEC 4.0

The annual charge is 0.75%, so it’s not cheap like a ‘plain vanilla’ ETF such as a FTSE 100 tracker where the fee may be 0.1% a year or less. With all of the ETFs in this article, you’re paying a fairly high charge to get full coverage of a particular niche in the technology sector and/or companies applying technology fairly heavily in their business.

  1. L&G ROBO Global Robotics and Automation UCITS ETF (ROBO)

This ETF was launched in 2014 and has been hugely successful. It now has more than $1 billion under management.

This ETF is broader with 88 stocks and 45% of the fund is invested in US stocks. It tracks the Robo Global Robotics & Automation UCITS index. About 40% of the index is in ‘bellwether’ stocks whose core business is robotics or automation while 60% of the index is in ‘non-bellwether’ stocks where a distinct portion of the business is connected to robotics and automation.

After each rebalancing, the bellwether stocks are all equally weighted within their 40% of the ETF, and the non-bellwether stocks are equally weighted within their 60%. Thanks to that equal weighting on the rebalancing dates, the top five stocks in the table below aren’t that far apart in terms of their portion of the fund. (The equal weighting isn’t sustained because obviously share prices move around until the next rebalancing three months later.)

Top five holdings

Stock % of ETF
Zebra 1.91
Yaksawa Electric 1.9
Mazor Robotics 1.86
Omron 1.85
Nabtesco 1.83

The annual charge is 0.8%.

If you’re interested in the robotics and automation theme, you should also look at the iShares Automation & Robotics UCITS ETF (RBOT).

  1. HAN-GINs Global Innovative Technologies UCITS ETF (ITEK)

This ETF tracks the Solactive Innovative Technologies Index which encompasses a wide range of companies that involved in innovative and disruptive trends across a broad range of industries.

Hector McNeil, co – CEO of Han ETF, says this ETF enables investors ‘to lean into the megatrends…the 4th industrial revolution. These include electric vehicles, robotics, blockchain, genomics and cloud computing.

Stock % of ETF
X-harvest CSI 3000 ETF 2.2
Mail.ru 2.1
Alphabet 1.51
Facebook 1.51
SINA 1.49

The ETF has just been launched and has 82 constituents. It has an annual charge of 0.75%.

  1. First Trust Indxx Innovative Transaction & Process UCITS ETF (LEGR)

If you’re excited about Blockchain, the technology behind Bitcoin, this could be the ETF for you. You won’t be putting your money into Bitcoin. Instead you’ll be investing in companies that are using the Blockchain technology to improve their businesses. It’s definitely not a pure technology fund – 56% is in the tech sector, but 29% is in financial services. 

Stock % of ETF
Ericsson B 2.01
Intel 1.88
Gemalto 1.88
Swisscom 1.88
Oracle 1.87

 The annual charge is 0.65%.

Not going away

Technology isn’t going away and it has to be on all investors’ radar. The only issue is valuation. If you’re confident enough to at least put you some of your money in tech, and I think you probably should be that confident*, then these ETFs are well worth considering.

Tune in to the latest Big Call Radio Show: Where now for technology?

  • OK, here’s a caveat. If you’re very risk-averse, or you think you might need the money in three years or less, then maybe you shouldn’t be that confident.
ETF Issuers Featured in this Article