ETF: Wesley Hellyar on tech ETFs

In ETF Blog, Latest by Kristia van Heerden

I’m not going to provide a deep-dive into how to evaluate a company, nor which company has the best management team, nor which ETF’s cost structure is the least of a rip-off. Instead, I’ll utilize my contrarian personal perspective and explain that, when it comes to technology, the most important question should be:  “Will this tech company change the world?”

This is more important than labouring on traditional investment terms such as ‘growth stocks’ and ‘value stocks’.

However, it must be said that this methodology is easier said than done. It also requires more in-depth reading into geek-inspired documentation than most normal human beings find socially acceptable. Importantly, one also needs the ability to sometimes admit defeat when changing one’s mind, like, for example, realizing at around 2007 that mobile handset market leader Nokia was no longer a great tech investment.

A final upfront warning/rant is that the vast majority of traditional investment leaders don’t understand tech – note that both Simon Brown and David Shapiro are exempt from this comment. As a result, the traditional folk make fundamentally flawed assumptions. Heck, even the legendary Warren Buffett was buying IBM when he should have been buying Amazon.

A major reason for this flaw in judgement is a thing they call a P/E (price to earnings) and evaluating a tech company on this, while the trailblazers from a West Coast USA city have long since boarded their rocket ship to the moon (and some to Mars).

A fine example of this is Amazon. Sure, everyone and their dog are now “fans” and jumping on the bandwagon, but for years I’ve had to listen to people (who thought that “high-tech” was a fast ADSL connection) go on and on about how expensive  Amazon was and how poor their profits were. All the while Jeff Bezos and his merry men quietly moved along from dominating eCommerce books to eCommerce in general, ‘the cloud’, content, logistics, AI and everything in between.

I must stress that understanding a company as a whole, including its underlying technology and the associated business model, is key.

On this note, I would like to start by discussing the JSE tech ETF that I least understand. Coincidentally, it’s my least favourite of the three.

Sygnia Itrix 4th Industrial Revolution (SYG4IR)

Now, even as a self-proclaimed geek, I’ve never heard of most of the companies being pulled into this fund, which follows the Kensho New Economies Composite Index (KNEX). Sure, airline industry behemoths Boeing and Lockheed Martin are familiar to me,  but I don’t understand their industry, how high-tech impacts their business model nor their associated risks. I also struggle to align either company with my “changing the world” methodology.

This fund once contained the incredible Nvidia, a company probably best known to most of us as the maker of the world’s finest graphics cards throughout the PC-era and, more recently, their foray into Bitcoin mining.  However, far more important to me is how the company is becoming a leader in the technology ‘driving’ autonomous vehicles – a sector still in its infancy, but sure to change the world. Disappointingly though, this stock has recently been dropped from the fund.

A positive drop from the fund was that of GoPro (the “camera on a stick” company) which is unlikely to change the world any further and surely will become an acquisition target for companies such as Apple or Google.

Onto the companies in the current 4IR fund. First up, the number one weighted stock, FLIR Systems. They are a market leader in thermal imaging, much like Lockheed Martin and Boeing.  If you’re expecting a war anytime soon, this stock could certainly become useful. Otherwise, it’s anyone’s guess as to what their future holds.

Next up is Harris Corporation. They are also involved in defense systems, including night vision and radio systems. The list of such companies goes on and on – Raytheon, Northrop Grumman and Kratos Defence & Security Solutions – all defense companies, all offering tech with a similar model to Harris Corporation.

I genuinely fear for the world if the 4th Industrial Revolution Fund is predicting a war!

I’m probably not the best person to offer advice on the likelihood of a war, but should one break out, I’d want to own high-tech companies who create defense (or attack) systems. This would be the best fund (after possibly gold) to own on the JSE. Otherwise, please do yourself a favour and rather look into one of the two options below featuring real tech companies.

STANLIB S&P 500 Info Tech Index Feeder ETF (ETF5IT) or Satrix Nasdaq 100 ETF (STXNDQ)

I’ve placed these two ETFs under one header because they are significantly weighted towards the same tech stocks, with Apple, Microsoft, Amazon, Alphabet (Google), Facebook, Intel, Cisco, Nvidia all leading the way.

Now for my favourite stocks.

I’ve already discussed my personal favourite – Amazon. Without boring you or Kristia – whose ear I have bent on the topic for many years – I don’t doubt that within the next year or so, Amazon will become the largest company in the world. The potential risk (more of a speed bump) could be regulatory risks in the U.S. and the fact that the eCommerce business could be split from their AWS Cloud/money printing business.

Next up is Alphabet, a company I’ve always liked, mostly due to their market dominance. For all intents and purposes, Google is the greatest (legal) monopoly on the planet. They would never refer to themselves as such, but along with Facebook, they absolutely are. The only reason regulation hasn’t clamped down on either of these two companies is that their particular monopoly (unlike Microsoft in the 90s) is beneficial to the consumer from a pricing perspective (mostly free!). The real losers resulting from these monopolies are the smaller companies and startups who are unable to compete in the digital advertising space (which is built around the search and social media sectors respectively) – this is a great thing if you are an investor.

A further potential upside for Alphabet could come as a result of one of their new business ventures taking off on a rocket ship of their own – this could well happen in the form of autonomous cars, cloud services, new internet services, AI and a mixture of these. The risk for Alphabet would also be in the form of regulation.

My next pick is Nvidia. Unfortunately, the world of traders and traditional bandwagon folk have jumped onto this stock and, as a result, the potential “change the world” hype is already priced in. I’d wait to pile into Nvidea at a discount and/or after a major downward market correction.

A tech stock list wouldn’t be complete without mentioning the top-weighted stock in the above-mentioned funds – the world’s largest company, Apple. With their incredible margins, their market dominance in the consumer-driven United States (a fan club who will continue to buy anything they release) and the fact that they make $1,444 profit per second. The risk to their business is their reliance on the iPhone and the subsequent slowdown in the growth of the global smartphone market. On the other side of this coin, I’d argue that their Services Business (App Store, Apple Music, Original Content etc.) is continuing to grow while offering incredible margins. Should Apple ever be looking for a new side-hustle, they could always buy Nike, Starbucks, Ford and Twitter with their free cash and have some left over.

When it comes to picking a JSE-listed tech ETF, it only realistically comes down to two of the three options. The deciding factor would be whether you own another S&P 500 fund. If so, this would already be dominated by similar S&P 500 stocks. In that case, the winner for me would be Satrix’s NASDAQ 100 and the fact that it includes several smaller tech stocks that aren’t in the S&P 500.

In closing, my disclaimer regarding me being a disruptive and contrarian geek, rather than an investment advisor. I’d recommend that you get a second opinion before making important life decisions such as where to place your hard-earned moola.

 – Wesley Hellyar

Wesley is a long-time friend of Just One Lap and by far the biggest tech nerd we’ve ever met. A digital strategist by trade, he has an insatiable thirst for anything tech. He also has boundless energy, as attested by the fact that until recently he was a semi-professional cyclist. From time to time he descends on Silicon Valley, where his remarkable networking ability gets him into rooms most of us can only dream of. He really digs Amazon, in case you missed that.

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