Go Quality for technology
The technology sector has presented a wealth of investment opportunities, though market euphoria has pushed many US technology companies to stretched valuations. However, not all tech companies are desirable from an investment perspective. Astute investors are seeking investments that can survive the downturns, as well as ride the upturns. Knowing where to look is the key.
Tech stocks all-time high echoes 2001
The Nasdaq 100, which is around 60% tech, has surged well through its previous 2001 high, as the chart below indicates. Many observers argue that valuations are justified based on still relatively low price-earnings (P/E) ratios and ongoing growth in underlying earnings.
Not all P/Es are low however. Some companies are trading at very high P/Es such as Amazon which is trading at a P/E of 183. Investors also need to consider the high level of debt some of these tech companies are accumulating.
Overly leveraged tech stocks are susceptible to rising rates
The cost to service corporate debt in the US has never been cheaper with record low interest rates. This is in direct contrast to 2000 when debt was expensive. However, the danger is that if growth and inflation accelerate and the Fed is forced to increase rates faster, companies with overly leveraged balance sheets may struggle to service their debts.
Take, for example, Comcast and Netflix. Comcast, which is a top 10 constituent of the Nasdaq 100, with a weighting of 2.8% and a P/E of 21.5, has a net debt/equity ratio of 112%. Netflix, with a 0.89% weighting in the Nasdaq 100 has has a P/E of 207, has net debt/equity of 113%. These are huge debt burdens which make these companies vulnerable to higher interest rates.
Quality technology companies
While the tech space continues to be a potential investment opportunity, it is prudent to separate those tech stocks that can be insulated against downturns from those that may fail.
QUAL has a 33% exposure to the international technology sector, with 44 shares in the tech space and most of those in the US. Companies are included in QUAL based on MSCI’s three quality factors:
low financial leverage;
high return on equity (ROE); and
stable earnings growth.
Technology companies excluded by MSCI include:
Stocks that have no ROE, such as Twitter;
Companies that lack stable earnings growth such as Tesla and Facebook; and
Those that are heavily indebted such as Comcast and Netflix.
VanEck Vectors MSCI World ex Australia Quality ETF (QUAL)
QUAL offers convenience, transparency and ease of access to quality international technology companies. QUAL has returned 17.28% since its inception in 2014 to the end of May 31, 2017 outperforming the MSCI World ex Australia Index by 2.25%.
For investors seeking exposure to the international tech sector screened for quality, QUAL provides a simple one-trade solution on the ASX.
IMPORTANT NOTICE: This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity and issuer of the VanEck Vectors MSCI World ex Australia Quality ETF (‘Fund’). Nothing in this content is a solicitation to buy or an offer to sell shares of any investment in any jurisdiction including where the offer or solicitation would be unlawful under the securities laws of such jurisdiction. This is general information only and not financial advice. It is intended for use by financial services professionals only. This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from the Fund.
QUAL is indexed to a MSCI index. QUAL is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to QUAL or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and QUAL.
QUAL invests in international markets. An investment in QUAL has specific and heightened risks that are in addition to the typical risks associated with investing in the Australian market. These include currency risks from foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and regulations including taxation.