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Here are some great ways to gain US tech stock exposure

Nicki Bourlioufas  |  13 Mar 2017Text size  Decrease  Increase  |  

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While it's difficult for Australians to invest directly in US shares and big name IPOs, managed funds and ETFs represent a good way to gain a diversified technology exposure.

 

Buying shares in the US IT sector can produce good returns, but also comes with a high level of risk, so spreading your investments among different companies in managed or exchange-traded funds (ETFs) can be an effective way to get diversified exposure to the sector.

While the Australian technology sector is just gaining momentum now, the US technology sector is well established and awash with money, as the IPO of SnapChat highlighted.

The appeal for investors in technology companies is the potential for quick growth. IT companies can expand very quickly, without requiring huge inputs of capital. Many companies attract investors on their names alone, and their shares can climb high despite losses, such is their appeal.

For Australian investors, it's possible to get exposure to the US technology sector. While it's difficult to invest directly in US shares and big name IPOs, managed funds and ETFs represent a good way of gaining a diversified technology exposure.

On the passively managed investments, the bronze-rated VanEck Vectors MSCI World Ex Aus Quality ETF (ASX: QUAL) has a 27 per cent exposure to US technology stocks, including Apple, Microsoft, Alphabet, Cisco Systems, Accenture, IBM, Intel, and Oracle. The ETF has returned 8.5 per cent over the past year.

"This ETF offers geographic diversification by giving Australian investors access to sectors that they would otherwise be underweight," says Arian Neiron, managing director of VanEck Australia.

"QUAL's largest sector weight is technology (32 per cent), however, it is also overweight healthcare (16 per cent) and consumer discretionary (17 per cent) and underweight financials (3 per cent of portfolio)."

The BetaShares NASDAQ 100 ETF (ASX: NDQ) (not rated by Morningstar) has an even greater exposure, or around 55 per cent, to US technology shares. That ETF has returned 18.4 per cent over one year.

On the actively managed side, Morningstar has three gold-rated international strategies--Platinum International Fund [4505], Magellan Global (ASX: MGE) and Capital Group New Perspectives [40984].

"Given its niche nature, there aren't a lot of managed funds available in Australia specifically focussed on US technology shares," says Michael Malseed, senior analyst, manager research, at Morningstar.

"Global funds will assess each IPO on its own merits, but given the diversified nature of their portfolio any individual IPO is unlikely to make up a significant portion of the fund."

The Gold-rated Magellan Global fund has an 80 per cent exposure to US stocks and around 30 per cent overall exposure to technology, predominately through large, well-established companies, including US technology stocks.

The fund has returned just 6.3 per cent over the last year, compared to an index return of 12.4 per cent for the MSCI World Ex Australia NR AUD Index, and 10.6 per cent over the last three years, in line with the benchmark.

Platinum International Technology [6644] (not rated by Morningstar) has around a 40 per cent exposure to US stocks, instead having a large investment in the Asian region.

That fund has returned 14.4 per cent over one year, compared to a return of 12.4 per cent for the MSCI World Ex Australia NR AUD Index, but just 7.8 per cent over three years, highlighting the point that technology shares too can experience challenging times.

Another offering with a high US and technology exposure is the Bronze-rated Generation Wholesale Global Share [15813], which has 73 per cent exposure to the US and 38 per cent exposure to technology.

This fund has easily outperformed the benchmark, returning 15.7 per cent over one year, and 15.0 per cent over three years, compared to 10.8 per cent for the benchmark.

For ethical investors, the Generation Wholesale Global Share Fund has an above-average Morningstar Sustainability Rating of four out of a possible five. So even though the fund isn't marketed as being a socially responsible investment, it meets certain environmental, social and governance criteria.

If you're planning to invest in funds focused on offshore assets, then you may need to think about hedging your currency exposure as movements in the Australian dollar can either erode or add value to your investment.

Any drop in the Australian dollar helps investors as it magnifies gains when assets are converted into local dollars. However, any rise in the Australian dollar diminishes returns when assets are converted into the local currency.

A currency-hedged managed fund may or may not charge a higher fee than the unhedged class, depending on the manager.

Magellan Global has the same fee across the hedged and unhedged funds. Platinum actively manages currency within the fund, rather than providing a specific hedged share class, leaving the decision on hedging to the fund manager.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.