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
return on equity (ROE); and
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)
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
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MSCI World ex Australia Quality ETF (‘Fund’). Nothing in this content is a
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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
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is available at www.vaneck.com.au
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the performance, or any particular rate of return from the Fund.
QUAL is indexed to a MSCI index. QUAL is not sponsored,
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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.