ETF Securities: FANGs defy rocky market
In hindsight, March 2nd, 2020, as the world started to get to grips with the scale of the global health emergency that was unfolding in the form of the Covid-19 pandemic, was an inauspicious time to launch a new investment product. In fact, the S&P/ASX 200 Index is down 19% since that day – after falling by as much as 29.4%.
That makes it all the more impressive that the product that debuted on the Australian Securities Exchange (ASX) that day has gained 5.5% in its shortlisted life.
The product is ETF Securities’ FANG+ ETF, which is designed to provide investors with a return (before fees and expenses) that tracks the performance of the New York Stock Exchange (NYSE) FANG+ Index, which was created by ICE Data Indices, LLC. The index is an equal-weighted index of ten holdings, of shares or American Depositary Receipts (ADRs) in ten major high-growth global stocks including Apple, Amazon, Alibaba, Baidu, Facebook, Alphabet (Google’s parent company), Netflix, NVIDIA, Tesla and Twitter.
The index represents some of the world’s most innovative technology leaders and smartest technology-enabled companies, some of which – for example, Apple, Amazon and Alphabet – have grown to rank among the most valuable companies on the global stock market. Half of the constituents are from the technology sector, while 30% and 20% come from the consumer cyclical and communication services sectors respectively.
The index assigns an equal weighting to its ten holdings, rather than apportioning investment by the proportion of market capitalisation, as are most major global indices, such as the S&P 500, FTSE-100 Index and S&P/ASX 200 Index.
Equal-weighting means that the performance of each company’s stock is equally important in determining the total value of the index: there is a body of academic research that points to equally weighted portfolios outperforming their market capitalisation counterparts over the long term and over almost all short-term periods. This is mostly due to the effect of selling high and buying low when rebalancing the portfolio, as is done regularly in an equal-weighted portfolio.
The FANG+ ETF provides investors with simple, low-cost access to ten of the main global technology leaders listed on major US stock exchanges, in the one listed instrument, which can be bought and sold in any amount throughout the ASX trading day.
Together, the FANG+ stocks are valued at more than three times the entire value of the S&P/ASX 200 index; they account for 17% of the S&P500 index, and 9% of the MSCI World Index.
The index has been a strong performer since its launch in September 2017. In Australian-dollar terms, the FANG+ index has returned 30.5% a year (to 31 March 2020, with returns prior to launch simulated), compared to 19% a year for its benchmark index, the Nasdaq 100 Index. In the March 2020 quarter, despite the Coronavirus Crash, the FANG index gained 10.5%, versus a 3% appreciation for the Nasdaq 100 Index.
Powering that performance have been very strong returns from Netflix (up 34.1% in 2020), Amazon (up 26%), Tesla (up 64.1%) and NVIDIA (up 14.5%). In the March quarter, Netflix added 16 million new subscribers – more than twice what it expected – as streaming use surges as people around the world isolate at home from the coronavirus pandemic. The company’s net income more than doubled to US$709 million ($1.1 billion) over the same period.
Similarly, analysts expect Amazon to produce stellar March-quarter numbers, on the back of surging online demand from locked-down consumers. More people working from home also creates an additional need for cloud storage, benefiting Amazon Web Services. Tesla is on a roll on the back of increasing deliveries of Model 3, which forms a major chunk of the electric car maker’s overall deliveries.
In fact, this is not a short-term strategy. The demand for the products of all of the ten FANG+ constituents should only rise over the long term, long after the Coronavirus pandemic recedes into the background. These are the world’s leading technology and tech-enabled companies, and major drivers of US. stock market returns. They are also companies most people know and whose products they use.
The FANG+ fund is unhedged, meaning that investors are exposed to fluctuations in the A$/U$ exchange rate – which can at times augment returns, just as it could, in other circumstances, work against them. While this might put off some investors, others may view the currency risk as actually another layer of diversification: given that most Australian investors hold at least 70%-80% of their assets in A$, a range of currency outcomes, that are not just A$-based, might be attractive.
For its global scope and concentrated exposure to world-changing themes such as digitisation and vehicle electrification, the FANG+ ETF is managed for an annual fee of 0.35%, with normal brokerage paid on buying and selling on the ASX.
By Kris Walesby, CEO of ETF Securities