Technology is more than just a sector, it’s an expression of human ingenuity and innovation. It can be considered a collection of some of the brightest people in the world looking to disrupt the status quo. The technology sector has continued to capture a large and expanding portion of the overall market, so it’s important to know what diversified solutions are out there for your clients.
Over the last decade, the popular FAANG1 stocks – Facebook (now Meta Platforms, Inc.), Apple Inc. (Apple), Amazon.com, Inc., Netflix Inc. and Google LLC (now Alphabet Inc.) – have seen their share prices climb by between 570% and 4,700%, according to S&P Capital IQ, while more people are interacting with these companies in their daily lives. That’s resulted in a lot more tech sector interest from Canadian investors.
Assets in tech-focused, Canadian-based mutual funds and exchange traded funds (ETFs) increased dramatically over the last decade. In 2012, Canadian-based tech funds had about 300 million in net assets; at the end of 2021 that number topped more than $15 billion, according to data from Morningstar.
Many Canadian advisors, however, are often focused more on putting client money in domestic banks instead of global tech companies. Currently, the sector only accounts for about 7% of the S&P/TSX Composite Index compared to 28% of the S&P 500 Index, according to S&P Dow Jones Indices.
Advisors also tend to purchase broad-market U.S. funds for their clients, and while they’ll own some tech stocks, that exposure will get watered down by everything else.
However, with technology becoming an ever-more integral part of society – whether it’s cloud computing, artificial intelligence or robotics – interest in tech is not going anywhere. That means advisors may want to start making the sector a bigger part of client portfolios.
“Given the current investment landscape, being underweight in the sector may not benefit investors in the long run,” says Trevor Cummings, vice president of ETF distribution at TD Asset Management Inc. (TDAM). “There’s an opportunity to add return potential to portfolios by making further allocations to technology.”
How can advisors do that? One of the options is by investing in globally diversified tech-focused ETFs.
Easier access with ETFs
Most advisors are familiar with ETFs these days, but many may not know enough about how to use them for tech investing, partly because they’ve employed other strategies for the sector.
For instance, clients will often own one or two mega-capitalization stocks like Microsoft Corporation, Apple or the Canadian tech-giant Shopify Inc. (Shopify), but that carries a lot of concentration risk, even if these companies are solid investments. This risk is especially true now, with inflation jitters causing investors to think twice about paying high prices today for earnings that may only materialize in the distant future.
“Technology stocks have had incredibly binary outcomes over the past several months,” says Cummings, adding that he believes they’re apt to either soar or plunge on a single set of quarterly results. “There is seemingly no in between on tech stocks right now, so we think it’s important to diversify.”
As advisors, you help guide your clients to the solutions that are suitable for them. What most clients are looking for when it comes to technology investments is diversified exposure to an attractive sector of the market. The obvious choice, then, is a technology index ETF. However, not all tech ETFs are created equal. Several track the technology-heavy NASDAQ Composite Index, but that index also includes non-tech stocks, like snack food makers, railways and discount stores.
As well, a lot of ETFs miss out on tech stars trading on other exchanges or don’t include up-and-coming names. They’re also largely focused on the U.S., even though there are plenty of other attractive tech businesses trading on exchanges around the world.
For advisors seeking pure exposure to the sector, they should consider an ETF that only holds tech companies and includes stocks that trade on exchanges from across the globe. There is one that fits that bill: the TD Global Technology Leaders Index ETF (TSX:TEC), which TDAM launched in 2019.
A truly global tech ETF
In a single low-cost ETF, the fund offers cap-weighted exposure to more than 250 tech companies. While it holds many of the well-known tech giants, it also owns names like Tokyo Electron Ltd., a Japanese semiconductor manufacturer, and Amadeus IT Group S.A., a Spanish IT provider.
In less than three years, it’s become one of the largest tech ETFs in Canada.
“This is one way to get global exposure at a low cost,” says Jonathan Needham, TDAM’s vice president of ETF distribution. “These are stocks that have moats around their businesses. They have strong cash flow and/or expected future cash flows.”
If advisors want to look a bit farther afield for tech names, they can purchase the TD Global Technology Innovators Index ETF (TSX:TECI), which aims to capture the next generation of tech leaders. It holds companies with market capitalizations of under $500 billion that may have higher rates of growth than the mega-caps.
Names include Advanced Micro Devices Inc., a California-based semiconductor company, Snowflake Inc., a Montana-headquartered data warehousing company, and Shopify.
“If I look at a portfolio and see a deficit in technology exposure, TEC can be a good way to remedy that, as it provides broad access to the technology of today and tomorrow. If an investor wanted to take that a step further, and tilt towards the potential prospects of tomorrow directly, TECI is designed for exactly that,” Cummings notes.
While it may be possible to shoot the lights out with a winning tech name, technology ETFs will often be the most diversified and lowest-cost solution.
With TEC and TECI specifically, advisors can take comfort in the amount of time and effort that TDAM put into helping design these indices.
“Quite frankly, they’re working,” he explains. “We wouldn’t be the size we are today without the support of the investment community and advisors.”
1The five prominent technology stocks that make up the "FAANG" acronym used extensively within the investment industry: Meta Platforms (Facebook Inc. Ticker: FB), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Alphabet Inc. (GOOG).
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