Investors with long time horizons may want to consider gaining some exposure to the technology sector in their portfolio. According to recent research by Fundstrat, the outperformance of US Technology stocks vs the S&P500 has been substantial. The last two periods of labour shortage were 1948-1967 and 1991-1999, and during both periods, technology price ratios were high, compared to the S&P500. For example, the Nasdaq 100 Index, which is heavily-weighted towards large-cap technology companies and is considered to represent the technology sector, substantially outperformed the general market, as represented by the S&P500. From 1991 to 1999, the Nasdaq 100 index rose by over 1500%, whereas the S&P500 rose by only around 300% for the same period. According to Fundstrat research, there is a possibility that we are nearing another labour shortage, as baby boomers start their retirements, and there may not be enough millennials to fill the gap. During periods of labour shortage, companies often consider incorporating technology and automation as a good alternative to their human counterparts, hence the outperformance of technology stocks vs. the overall market.
Investors who are interested in technology stocks may want to consider ETFs (Exchange-Traded Funds). The popularity of ETFs is due in part to their low management expense ratios (MERs). Investors also use them to target specific areas of interest. These days, most investors are paying attention to the buzzed-about FAANG stocks: Facebook, Apple, Amazon, Netflix, and Google (Alphabet). These are the biggest innovators and leaders in the technology sector, and are, in aggregate, expected to have tremendous growth in the foreseeable future. However, it may come as a surprise to many that the popular technology sector ETF, called XLK, does not include 4 out of the 5 FAANG stocks (Facebook, Amazon, Netflix and Google). The top 5 stocks in XLK include Microsoft, Apple, Visa, MasterCard, and Intel.
The reason why these FAANG stocks are excluded from the technology sector ETF is because of the recent GICS (Global Industry Classification Standard) realignment in September of 2018. This realignment greatly impacted three sectors: Information Technology, Consumer Discretionary, and Telecommunication Services; the latter was broadened to include internet and media platform companies, and renamed “Communication Services.”
Under the new realignment, Facebook and Google (Alphabet) were moved from the “Information Technology” sector to the new “Communication Services” sector; Netflix was moved from “Consumer Discretionary” to “Communication Services.” Apple remained in the “Information Technology” sector, with an increased weighting; and Amazon remained in the new “Consumer Discretionary” sector, also with an increased weighting.
How should investors gain exposure to the FAANG stocks, then? Consider investing in an ETF called QQQ. All of the FAANG stocks are included in the top 15 stocks of QQQ, with 4 out of the 5 stocks in the top 10. It is mainly invested in large-cap companies (over 90%). Investors who seek some diversification away from information technology may also prefer QQQ to XLK, as QQQ also includes non-tech sectors. The approximate current allocations are as follows: 46% Information Technology, 22% Communication Services, 16% Consumer Discretionary, 6% Consumer Staples, 7% Health Care, 2% Industrial, <1% Financials.
We suggest speaking to your advisor, to determine which ETFs will get you the exposure that you seek.