What does Facebook’s share price slump mean for ETF investors?

by , 30th July 2018

Facebook’s share price fell 20% last week after the tech giant gave a very disappointing update to the market on Wednesday. The company warned that margins would fall as more money was spent on security and privacy, and added that revenue growth is expected to slow down as well.

This share price tumble comes a fortnight after Netflix had a wobble following weak viewer numbers. And then in similar vein, shares in Twitter tumbled 20% on Friday after the company said it would focus on shutting down dodgy accounts rather than adding fresh users to the service. The tech-heavy Nasdaq index also fell – down about 2% in the second half of the week.

Could this mean that the great tech share boom we’ve seen since 2010 is now coming to an end? Well, not necessarily. Tech bulls can point to one piece of good news last week – Amazon announced better than expected profits and the shares rose. The US economy is also growing strongly and various tech companies have bounced back from short-term problems in the past.

On the other hand, the valuation of many leading US shares has risen too high, and the Facebook news could enough to make more investors see that. Personally, I think there’s a strong chance that we’re at a turning point for Facebook and a decent chance we’re at a turning point for tech shares and perhaps the wider market.

ETF investors

So if I’m right, what does this mean for ETF investors?

If you have money invested in any US ETFs, it’s worth finding out how exposed they are to Facebook and the other major technology stocks.

Let’s start with a nice and simple S&P 500 tracker. (The S&P is the flagship index for the US stock market.)  Here’s the biggest holdings for the SPDR S&P 500 UCITS ETF (SPY5)

Stock % of index
Apple 3.97
Microsoft 3.5
Alphabet 3.2
Amazon 3.03
Facebook A 1.76
JP Morgan 1.63
Berkshire Hathaway 1.58
Exxon Mobil 1.48
Johnson & Johnson 1.45

 

Overall, 26% of the S&P 500 is comprised of IT stocks.

As you’d expect for a broad index, there are several non-technology companies in the top holdings list. What’s more, not all the tech companies are the same. Apple, for example, is trading on a relatively low valuation – a price/earnings ratio of around 18. Before last week’s share price fall, Facebook’s p/e was in the 30s while Amazon is way higher. So an S&P tracker might not be too hard hit by further falls in tech stocks, except of course, a falling tech market could affect other sectors too.

Turning to Nasdaq, let’s look at the iShares NASDAQ 100 UCITS ETF USD (CNX1) . Here are the largest holdings:

Stock % of index
Apple 11.18
Amazon 10.27
Microsoft 9.86
Alphabet 9.68
Facebook A 4.95
Intel 2.85
Cisco 2.4
PepsiCo 1.91
Comcast 1.87

 

It’s clear from the list that Nasdaq is a much more tech-heavy index.

It’s a similar story if you invest in a US information technology ETF. Here are the top holdings for the iShares S&P 500 Information Technology Sector UCITS ETF (IUIT).

 

Stock % of fund
Apple 15.1
Microsoft 13.4
Alphabet 12.1
Visa 4.0
Intel 3.6
Cisco 3.2
Mastercard 3.0
Nvidia 2.5

 

Alternatives

So if you want to reduce your exposure to technology, were should you go?

Well, plenty of pundits would suggest in investing in the quality factor. Quality stocks are often defensive – in other words, they’re more likely to be resilient when other shares are falling. (Quality stocks tend to generate plenty of cashflow, have strong balance sheets and also deliver decent returns on capital.)

But personally, I’d rather go for value shares right now.

Granted, you wouldn’t normally expect them to outperform at this stage in the economic cycle, and value shares have under-performed for at least a decade now. But I’m drawn to the fact that they’re relatively cheap at the moment – that’s in comparison to valuations in the past.

Here are three value ETFs that are worth a look:

iShares Edge MSCI USA Value Factor (IUVD) – this gives exposure to US value stocks and charges 0.2% a year. Its top holdings include financial stocks such as Citigroup and Bank of America as well as Pfizer and Walmart.

Lyxor SG Global Value Beta (SGVL)  – this is a global value ETF

PowerShares FTSE RAFI UK 100 ETF (PSRU) – Although value isn’t in the title, this is basically a value ETF. The underlying index for the fund is managed by Research Associates, which is Rob Arnott’s business.

Another option is to invest in fixed income, which, of course, is normally a lower risk option than stocks and shares. (It may offer much lower returns too.) The problem with fixed income at the moment is that bond yields are still very low which means that bond prices are unusually high. That’s not good news for potential returns.

However, if you go for bonds with short maturities, the risk is low. If, for example, you invest in a bond that matures in two years, there isn’t that much time for interest rates to rise too much, and any way, with a short maturity bond, a rise in rates has a smaller impact on your overall return from the investment.

One option here is the iShares $ Short Duration Corporate Bond (SDIG) which invests in US corporate bonds with maturities up to 5 years. It has a Total Expense Ratio of 0.2%.

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