Do you need to de-FANG your portfolio? - MoneySense

Do you need to de-FANG your portfolio?

ETFs have different exposure to volatile tech stocks. Do you know what yours hold?

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Led by the FANG stocks—Facebook, Amazon, Netflix, Google—large-cap tech stocks have been at the heart of the post-election Trump rally that now seems in danger of petering out. (Some prefer the acronym FAAMG, which adds Apple and Microsoft).

In recent weeks, this red-hot sector has started to sag and if you hold broad market ETFs, you are probably feeling it. There is a high probability you don’t even know just how exposed you are to this sector.

So just how much exposure do some of the broad-based exchanged-traded funds, like the ones MoneySense panel of experts select for the annual ETF All-Stars feature, have to the volatile tech sector? The answer: it varies. But it’s worth knowing, whether you’re interested in reducing tech exposure to your portfolio mix, boosting it or just want to be aware of where the current volatility is coming from.

One of our All-Star picks, the Vanguard S&P 500 Index ETF (TSX: VFV), is 25% in technology, 22.5% in information technology and 2.3% in telecommunications.

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International ETFs also have a decent amount of exposure to tech firms based outside North America. The All-star iShares Core MSCI All Country World ex-Canada Index ETF (XAW) is 17% in information technology and 3% in telecommunications, spread among 22 countries. Diversification means you have less to worry about with the downside of a tech swoon in that fund, although 20% is a hefty enough allocation that you’d be happy when technology was in its normal long-term ascendency.

But our other international pick, the iShares Core MSCI EAFE IMI Index ETF (XEF/TSX) has just 6.6% in info tech and 4% to telecom.

At the other extreme are broad-based Canadian market ETFs. The TSX is famously overweight three sectors: energy, materials and financials, but none of those are tech. No surprise our All-Star Canadian equity pick, the Vanguard FTSE Canada All Cap Index ETF (TSX: VCN) has minimal exposure to tech: 2.5% in technology and 2.5% in telecommunications, for a total of 5%. I’d be more worried about VCN’s exposure to big banks or energy stocks, not technology.

All-Star panelist Alan Fustey, vice president of Winnipeg-based Index Wealth Management, generally uses only large-cap ETFs like iShares’ XIU or Horizons’ HXT (another All-Star), which represent the more concentrated S&P/TSX 60 Index. The only company Fustey considers “tech” in this index is Constellation Software, and it makes up only 1% of the index.

So investors using broad-based Canadian ETFs may need to watch how much exposure they have to financials and resource sectors, but they needn’t worry about overexposure to tech stocks. To be truly diversified and participate in the long-term growth of technology, Canadians need to look to the U.S. market, says All-stars panelist Mark Yamada, president and CEO of Toronto-based PUR Investing Inc.

For Canadians desiring more exposure to U.S. techs than available through broad-based US equity ETFs like VFV, several ETFs trading on both US and Canadian exchanges provide exposure to the Nasdaq 100 index, which is 58% in technology. The classic US dollar ETF is PowerShares QQQ, but versions trading in Toronto from domestic ETF manufacturers provide comparable exposure in both currency-hedged and unhedged versions. As Fustey notes, “whatever direction tech moves, the QQQ will follow.” However, Fustey’s firm generally avoids making sector bets for clients.

“For most investors NASDAQ 100 is good enough,” Yamada says, adding the caveat that the top 10 holdings account for more than 50% of the index. But for true tech believers who want to focus on the Internet, consider one my daughter owns in her TFSA: the PowerShares NASDAQ Internet portfolio, or PNQI. This provides one-shot exposure to U.S.-based internet firms, with large (8% or so) positions in the FANG-type stocks, as well as many smaller positions to tech/internet firms that are not household names.

The other major U.S. Internet-based ETF is the First Trust Dow Jones Internet Index Fund (FDN), with FANG stocks making up 32%, according to Tyler Mordy, president and chief investment officer for Kelowna, B.C.-based Forstrong Global Asset Management Inc. FANG stocks make up a third of both ETFs, but Mordy’s preferred pick is QQQ.

Having a four stocks account for a third of an ETFs holding is signfiicant, but it doesn’t concern All-Star panelist Yves Rebetez, editor of ETFInsight.ca in this instance. Despite recent volatility, he doesn’t believe the FANG/FAAMG stocks are going away anytime soon. “Unlike 2000, when valuations were stratospheric, oodles of profits are being made by these companies, but less so Amazon.”

Rebetez says basket exposure through ETFs like the provide diversification beyond the five or six big names. Apart from hedged and unhedged Nasdaq 100 ETFs trading on the TSX, several focus entirely on Technology. Local players like First Trust, First Asset and Questrade all employ methodologies that include more frequent rebalancing, quant screens, and assessments of whether a CAD-hedged approach is necessary or not.

Larry Berman, CIO of Toronto-based ETF Capital Management, is bullish in the long run on tech but expects more downside in the shorter run. For a more defensive way to play large-cap tech, he suggests the First Asset Tech Giants Covered Call ETF (CAD-hedged), ticker TXF.  Berman warns against buying into this sector now as he expects tech will lead the way in any global valuation correction.

Forstrong’s Mordy has a neutral sector weighting in technology and its portfolios hold no tech-specific ETFs. Tech companies are delivering products the public likes and generating strong earnings, but as global asset allocators “we are pivoting away from US stocks: the overall US stock market is the most expensive it has been in the last ten years.”

My own conclusion? For Couch Potato investors with proper US and global broad-based ETF exposure, you have enough tech exposure in the ETFs. Canadian-centric investors suffering from home country bias and convinced tech is the future might want to add some global ETFs or some of the technology-focused ETFs mentioned above.


Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. He can be reached at jonathan@findependencehub.com

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