It’s been a wild year for many of the mighty technology stocks that have driven most of the markets’ equity gains over the last few years. Apple, Microsoft and Amazon, the three largest stocks in the tech-heavy NASDAQ 100 Index, have all fallen by double digits since January, while the index itself, which also includes Meta, Tesla and Alphabet, is down by 24% year-to-date, as of May 16.
“A lot of people are going more defensive right now,” notes Simon Ste-Marie, Vice President, ETF Strategist, Eastern Canada at Invesco Canada, adding that with interest rates rising and concerns over a slowing global economy, many investors are shifting their weighting toward value and dividend stocks, or out of the markets altogether.
Call it a contrarian play, but Ste-Marie and his colleagues think this is an opportune time to put
high-quality technology stocks, which are now at a substantial discount, at the core of your U.S. Equity exposure. “We see opportunities in U.S. stocks and in particular U.S. growth stocks,” he says.
Invest in tech for the long term
The reason for the correction, he says, has been rising inflation and interest rates – not because there’s something fundamentally wrong with these businesses. “It’s the expectation of Federal Reserve Bank tightening that’s brought growth and tech stocks down,” Ste-Marie explains.
Indeed, tech stocks are long-duration assets that tend to struggle when the value of their future earnings, which is what their stock price is largely based on, erodes. Inflation causes the net present value of those future earnings to be discounted. However, that doesn’t hold true for every tech stock. Some can use cash on hand or current cash flow to buy back shares, in effect shortening their duration.
As well, there’s not a clear correlation between rising interest rates and poor performance for growth stocks. If you examine past Fed tightening cycles going back to 1983, U.S. large-cap growth stocks outperformed the broad equity market 67% of the time. During the last rate-hike cycle, from 2015 to 2018, the Nasdaq 100 outperformed the S&P 500 by 12.2% and the S&P 500 Value Index by 19.4%, on the way to a cumulative total return for the period of 40.6%.
Everything that’s made technology attractive over the past decade also still applies. Many of these companies continue to create and exploit secular changes in the marketplace, whether it’s e-commerce, genomics, artificial intelligence or social media, for example. The sector’s influence over the way we live our lives isn’t going anywhere. “One of the key drivers is research and development, which is still continuing,” Ste-Marie says, noting how the Nasdaq 100 invests in R&D as a percentage of revenues at double the rate of the S&P 500. That’s despite the fact that 77 companies are included in both indices.
Balance the ups and downs with ETFs
Even with continued long-term growth potential, buying individual stocks still puts you at risk of catching a falling knife during volatile periods. A better way to take advantage is to own the whole sector through a cost-effective, Nasdaq-focused exchange-traded fund (ETF).
One option for investors is Invesco’s innovation suite of Nasdaq index ETFs. The main funds within the group are the Toronto Stock Exchange-listed Invesco Nasdaq 100 Index ETF (QQC) and its Canadian-dollar-hedged version (QQC.F), which hold the largest 100 non-financial companies listed on the NASDAQ, based on market cap.
Investors who wish to avoid overexposure to mega-cap stocks like Apple and Microsoft can opt for the Invesco Nasdaq 100 Equal Weight Index ETF (QQEQ) and the Canadian-dollar-hedged (QQEQ.F), while those who want to focus on more of the up-and-coming names on the exchange can buy the Invesco Nasdaq Next Gen 100 Index ETF (QQJR, QQJR.F), which tracks an index of earlier-stage growth stocks that come with a higher risk and return profile.
“That’s my personal favourite,” says Ste-Marie of the Next Gen 100 ETF. “It gives you exposure to the future innovators of tomorrow.” He offers the example of Fortinet, a stock that graduated from the Next Gen 100 to the Nasdaq 100 last December after growing 142% in a year. “This is the kind of growth the Next Gen index tries to capture.”
Both the Nasdaq 100 and the Next Gen 100 funds also come in versions that screen for environmental, social and governance (ESG) criteria, for investors who prioritize responsible investing. Those funds include the Invesco ESG Nasdaq 100 Index ETF (QQCE, QQCE.F) and the ESG Next Gen 100 Index ETF (QQJE, QQJE.F).
All these funds offer diversified exposure to 18 of the most sought-after themes in equity investing, such as artificial intelligence and big data, clean energy and cybersecurity. They also represent the most liquid way for Canadian investors to access the tech universe. The bid-ask spread is also typically tighter than competing Canadian ETFs.
And with a management expense ratio of just 20 basis points for QQC, Invesco’s innovation suite is also the cheapest way for Canadian investors to gain exposure to the Nasdaq.
With markets as volatile as they are, “the expectation should not be to get an 18% compound rate of return over the next few years,” Ste-Marie cautions, which is what the Nasdaq 100 has returned over the past decade in Canadian dollars. There could be big swings, down one year and up 30% the next, but “if you’re willing to own this for the long term, when these indexes experience a drawdown, like they’re seeing now, it’s a great opportunity to buy.”