Global tech sector remains a compelling investment theme

From

Kanish Chugh

The strong growth of companies in the tech sector remains a popular theme with investors, who continue to build their holdings in tech-focused exchange traded funds (ETFs).

According to the latest update from ETF Securities.,  the ETFS Morningstar Global Technology ETF has been one of its top performers, in terms of funds inflows, so far this year.

ETF Securities Head of Distribution, Kanish Chugh, says the reason tech ETFs continue to attract funds is clear – the companies in their portfolios have very strong fundamentals.

“The numbers speak for themselves. The S&P 500 technology sector index, which measures the share market performance of the biggest technology companies in the world, has produced a five-year annual return of 25%.”

“In contrast, the S&P 500 ex-technology index has produced a five-year annual return of just 11%.”

Chugh says this performance has been driven by fundamentals, with the S&P tech companies having the highest rate of growth in earnings per share over the five years and the highest level of earnings per share currently.

He says investors can see evidence of the sector’s momentum in many areas of their lives – from banks accelerating plans to digitise their services to households consuming more video and music via streaming services.

ETF Securities’ TECH ETF provides investors with exposure to more than 30 large and mid-cap companies around the world (predominantly in the United States).

Launched in April 2017, the fund has produced an average return of 27.1%[1] a year since then, compared with a return of 13.4% a year for the MSCI World Index over the same period.

In the year to the end of April the fund returned 42.7%, compared with the MSCI World Index return of 23.2 per cent[1].

Chugh says the tech sector is a strong performer on a number of other fundamentals. Over the past 10 years the sector’s growth in sales per share has been second to the healthcare sector and its high margins make it one of the best sectors for converting revenue into earnings.

And many tech companies have ‘moats’, which means it is hard for competitors to break into their markets because switching costs are high or network effects support incumbents.

Morningstar, which provides the underlying index for TECH, uses a proprietary research methodology to identify companies with moats – in other words, sustainable competitive advantages.

“The Australian share market has only a very small tech sector, which makes up just 4% of the S&P/ASX 200. As a result, Australian investors focused on the local share market are underweight tech,” Chugh says.

He notes three reasons why the technology sector will further continue to grow.

“The first of these is the coronavirus. The global vaccination drive is causing some to bet on a recovery and a rebound for non-technology stocks that suffered from the virus. From our perspective many of the technological changes the coronavirus has brought about are permanent and will survive any return to normal type scenario. For us, a big one is working from home, which will likely boost the technology that enables remote work (Microsoft Teams is a key example).

“Another likely driver of technology sector outperformance is cloud computing. Many diversified cloud businesses, such as Oracle and Citrix Systems, are included in our fund.

“And finally, the ongoing migration towards subscription models. In times past, consumers and businesses buying software and hardware would make one-off transactions, often at shops. For example, businesses buying Microsoft Office could buy the CDs one year from their local computer shop and then use that version of software for several years (“pay and leave”). These transactions were one-off and unpredictable. It required tech companies to start every year from zero. This made revenue and earnings harder to model.

“In recent years, however, tech companies have moved more towards subscription models, where licenses are perpetually renewed. Hardware providers, like Apple, have made continual updates, encouraging consumers to buy new iPhones and ditch old ones – which in practice functions much like a subscription model.

“We believe that the tech industry will continue moving towards this model and the market will continue reacting positively,” says Chugh.

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[1]  Net of fees and expenses

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