TD Asset Management’s TEC ETF gives investors more pure play exposure to the sector.
You don’t have to be Mark Zuckerberg or Jeff Bezos to make money off technology. Over the last decade, investors around the world have seen their portfolios climb thanks to rising tech stocks. Since July 2010, the S&P 500 has climbed by 200 percent, largely due to gains in Apple, Microsoft, Amazon, Alphabet and Facebook, all of which have climbed by more than 440 percent, and account for about 18 percent of the overall index, according to S&P Capital IQ. The more tech-focused NASDAQ, which holds these same five companies, among 2,295 others, is up 470 percent over the same time period.
Below is a chart that shows the TD Global Technology Leaders Index ETF performance since inception (May 9, 2019 to July 8, 2020), compared to NASDAQ Composite and the S&P 500 Total Return Index.
Despite the big gains, many investors and analysts, including Vitali Mossounov, a global technology analyst at TD Asset Management (TDAM), are still bullish on the sector. With increasing demand for artificial intelligence and with 5G networking promising to transform the Internet of Things (devices that communicate with one another) the tech industry should continue to thrive for years to come.
“Look around you,” says Mossounov. “The potential for technology and the penetration of technology is only increasing. Tech companies are going to grow their sales and earnings faster than the market and that’s likely going to translate into better returns.”
More pure play tech ETFs needed
Many investors receive their technology sector exposure through either broad-based or sector-specific exchange-traded funds (ETF). The most popular technology ETF, with more than $118 billion in assets under management, is QQQ, which tracks the 100 largest companies on the NASDAQ.
What investors may not realize, though, is that many of the tech ETFs on the market, especially the ones that track the NASDAQ, aren’t pure technology plays. For instance, over 30 percent of QQQ’s holdings are considered non-technology sector stocks. About 20 percent is invested in the communication industry and 17 percent in consumer discretionary companies.
“If you wanted to buy an ETF that focused on technology, you had to buy something that was replicating the NASDAQ,” notes Mossounov. “But if you’re looking for technology exposure and you buy a product that replicates the NASDAQ, it's far from a perfect solution.”
A better ETF for tech investors
In May 2019, TDAM, noticing a gap in the tech-focused ETF market, launched the TD Global Technology Leaders Index ETF, which trades as ticker, TEC, on the TSX. Unlike many of the other funds on the market, TEC only tracks technology firms, including the big five, but it also includes companies from outside the U.S., such as Germany’s SAP and Canada’s Shopify.
TEC was created to give investors more technology sector exposure, explains Mossounov. TDAM worked with Germany’s Solactive, to create the Solactive Global Technology Leaders Index, which the ETF now tracks.
“We set out to create a product that is truly, a purer technology exposure,” he says.
TEC is considered a “hybrid” ETF. It’s not actively managed, but it is rebalanced annually, and TDAM does have the ability to make tweaks, such as adding new themes or industries, to the fund once a year.
“There is a unique calibration element to this fund. Once a year, we can apply our expertise to identify new technology themes or relevant industries and modify the composition of the ETF. The core is still there, Apple, Microsoft for example, but investors also get to participate in potential upside from emerging technologies,” explains Mossounov.
With 209 holdings, investors are getting more diversification than they would with a NASDAQ 100–tracking ETF, and certainly more than if they bought a few tech stocks themselves. They’re also getting an opportunity to own a broad cross-section of companies, such as Intuitive Surgical, which uses robots to perform surgery, and Amadeus IT Group, a multi-billion dollar Spanish firm that processes payments for travel and tourism companies. It also holds Dell, Visa, Gartner and Toronto’s Constellation Software.
TEC’s 0.35 percent management fee is also attractive, especially considering that this is a unique offering in Canada.
Suitable for most portfolios
TEC can be a part of any investor’s portfolio, according to Mossounov, though how much you might allocate to it depends on your time horizon, risk tolerance and investment goals.
“If you’re younger, you’re more familiar with these technologies, you have a higher risk tolerance in the market, this absolutely should be one of your go-to products,” he says. “For someone’s parents or grandparents, it would be proportionally less. But if you look at the leadership and the quality that comprise it, we think a majority of investors can benefit from this product given technology's omnipresence in everyone's life."
It’s also ideal for anyone who believes in the future of technology, like Mossounov does.
“Technology companies are disrupting the world, the way we live our lives and the way we conduct business,” he notes. “You need to have exposure as an investor to this, because it’s going to be a great area for growth in the years and decades to come.”
To learn more about TD Asset Management’s new ETF products and innovations, click here