Big tech marked down: time to buy?

When it comes to the technology sector, it had seemed for many years as if the only way was up. And before corporate rebrands kicked off, their largest names even had their own acronym “FAANGs” for Facebook, Apple, Amazon, Netflix and Google.

The tech era

Technological innovation remains a central driver for growth in today’s world and much had been written about the dislocation of some big tech companies’ share price valuations from their financial fundamentals and profitability. The Covid-19 pandemic bolstered this trend and was a sugar-rush for the likes of Amazon and Netflix. Unlike dirty “big oil” of yesteryear, “big tech” was low carbon and “clean”. In quarter four (Q4) 2021, valuations began to look bubble-esque, and tech dominated the US equity market which dominates world equity indices. For some passive investors, and active investors shy of benchmark risk, tech’s valuation and concentration created its own set of risks.

Old world economics

So it was perhaps inevitable that in 2022, a world away from the easy-money environment of the last decade, the relentless upward grind of interest rates and inflation has triggered a de-rating and a heavier discounting of future growth. This was old world economics in action as the easy money era came to an end.

Since the start of the year, FAANG share prices have fallen by anything up to almost three quarters (in Meta’s case) and disappointing earnings announcements last week prompted a further mini-rout. So is this now a buying opportunity? For those minded to think so, there are a number of ways to get exposure:

What are the options?

• For US tech, the iShares S&P 500 Information Technology Sector (LSE:IITU) is the largest exchange traded fund (ETF) to provide access to the sector priced at 0.15% TER, and consisting of 76 US tech companies weighted by market cap. It’s largest holding is Apple at 26% and the fund’s structure is “physical” (it owns the underlying assets).
• The Invesco US Technology Sector UCITS ETF (LSE: XLKQ) is a slightly cheaper 0.14% TER alternative and caps any one constituent at 19% thereby reducing single-stock risk. The fund’s structure is “synthetic (swap-based)” rather than physical – meaning there is counterparty risk.
• For those wanting a broader view, the Xtrackers MSCI World Information Technology UCITS ETF (LSE:XDWT) covers large and mid-sized listed technology holdings across the world expanding the universe to 195 names, but as a cap-weighted index it’s still dominated by the US which makes up 86% of the index. The fund is physical and higher cost at 0.25% TER.

Whilst investing in individual names can be interesting, tech-focused ETFs enable a more diversified approach. And for those concerned about concentration risks, a close look at the index rules and resulting holdings is informative.

Notices

All ETFs mentioned are London-listed ETFs

Your capital is at risk. The value of shares, ETFs and ETCs can fall as well as rise, which could mean getting back less than you originally put in.

The views and comments are the author’s own and do not constitute a personal recommendation, advice or marketing communication.

This is not an offer of, or solicitation for, a transaction in any financial instrument. Neither the author nor IG accept responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk.