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This ETF you can sink your "FAANGs" into

Nicholas Grove  |  30 Aug 2016Text size  Decrease  Increase  |  

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There are countless Australians who access Facebook, Google or Amazon every day while using an Apple iPhone or iPad. So why shouldn't they also be investors in these companies?


There are countless Australians who either jump on Facebook or Google every day (if not every hour), order a seemingly limitless variety of goods from Amazon, all while doing these things on a device manufactured by Apple.

They might even follow up this activity by relaxing and binge-watching some episodes of House of Cards, Stranger Things (a personal favourite) or Daredevil on Netflix--most likely also on an Apple device.

So, as users of these products, why should Australians also not be investors in them?

After all, these are formidable companies--as exemplified by the moat ratings assigned to them by Morningstar.


With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for social network online advertising, according to Morningstar equity analyst Ali Mogharabi.

Mogharabi assigns Facebook a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps.

"Given its ability to profitably monetise its network via advertising, we think it is more likely than not that Facebook will generate excess returns on capital over the next 20 years," he says.


The wide-moat-rated Amazon has played a key role in the structural shift away from brick-and-mortar retail to the online space, according to Morningstar analyst Wayne Stefurak, and the company may also "lay waste to many other retailers in the years to come".

Stefurak also describes Amazon as "the most disruptive force to emerge in retail in several decades".

"Its low-cost operations, network effect, and laser focus on customer service provide it with sustainable competitive advantages that traditional retailers cannot match--this should yield additional market share gains in the years to come," he says.


When it comes to the world's biggest company in terms of market capitalisation, Morningstar equity analyst Brian Colello believes Apple's strength lies in its expertise in integrating hardware, software, services, and third-party applications into differentiated devices that allow it to capture a premium on hardware sales.

However, even though Apple may have a "sterling" brand, strong product pipeline, and ample opportunity to gain share in many end markets, Colello says short product life cycles and intense competition prevent the firm from carving out a wide economic moat.

"We believe Apple has developed a narrow economic moat, thanks to switching costs related to many attributes around the iOS platform that may make current iOS users more reluctant to stray outside the Apple ecosystem for future purchases," he says.


Also boasting a narrow economic moat is streaming-video-on-demand pioneer Netflix.

Morningstar equity analyst Neil Macker explains that Netflix's competitive advantages stem from its rapidly expanding subscriber base.

It is this base of over 50 million subscriptions worldwide that creates a "humongous" data set that Netflix mines in order to better purchase and create content, Macker says.

"Through the streaming video delivery method, Netflix tracks every customer interaction, from large (total time spent at Netflix) to minute (whether a user pressed fast forward)," he says.

"This data is aggregated in a massive cloud database housed across multiple data centres worldwide.

"Netflix can query this information to better understand network and device performance, customer behaviour, and content popularity."


The parent company of Google, Alphabet dominates the global online search market with a market share of above 80 per cent.

Morningstar equity analyst Michael Dimler assigns Alphabet a wide moat rating due to sustainable competitive advantages derived from the company's intangible assets, as well as the network effect.

"We believe Alphabet holds significant intangible assets related to overall technological expertise in search algorithms and machine learning, as well as access to and accumulation of data that is deemed valuable to advertisers," he says.

Alphabet's network effects are derived mainly through its Google products such as search, Android, Maps, Gmail and YouTube, Dimler says.

Sink your FAANGs into an ETF

One of the traits shared by all of the aforementioned companies--Facebook, Amazon, Apple, Netflix and Alphabet (Google), otherwise affectionately referred to in US investment circles as the "FAANGs"--is that they're listed on the NASDAQ.

Australian investors wanting to get exposure to the NASDAQ Index can simply do so through an exchange-traded fund.

The investment objective of the BetaShares NASDAQ 100 ETF (ASX: NDQ) is to track the performance of the NASDAQ 100 Index, before fees and expenses.

The index provides investors with exposure to the performance of the 100 largest non-financial securities listed on the NASDAQ by market capitalisation.

As at 30 June 2016, Apple was the largest holding in the index, followed by Microsoft, Amazon, Facebook and Alphabet.

BetaShares describes NDQ as a "simple and cost-effective way to access a diversified portfolio of some of the world's most revolutionary companies".

As always, whether or not this ETF has a role to play in a portfolio depends upon an individual's financial goals and personal circumstances.

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Nicholas Grove is a Morningstar journalist

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