Global tech sector still strong

Global technology sector remains an attractive investment theme while tech exchange traded funds (ETFs) continue to attract funds due to strong fundamentals of the companies in their portfolios, according to ETF Securities.

ETF Securities head of distribution, Kanish Chugh, said that performance was driven by fundamentals, with the S&P tech companies having the highest rate of growth in earnings per share over the five years and the highest level of earnings per share currently.

The S&P 500 technology sector index, which measures the share market performance of the biggest technology companies in the world, produced a five-year annual return of 25% while the S&P 500 ex-technology index produced a five-year annual return of just 11%, Chugh said.

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According to him, investors could see evidence of the sector’s momentum in many areas of their lives – from banks accelerating plans to digitise their services to households consuming more video and music via streaming services.

However, the Australian share market had only a very small tech sector, which made up just 4% of the S&P/ASX 200, and as a result, Australian investors focused on the local share market were underweight tech.

Chugh said that there were three reasons why the technology sector would further continue to grow.

“The first of these is the coronavirus. The global vaccination drive is causing some to bet on a recovery and a rebound for non-technology stocks that suffered from the virus. From our perspective many of the technological changes the coronavirus has brought about are permanent and will survive any return to normal type scenario. For us, a big one is working from home, which will likely boost the technology that enables remote work (Microsoft Teams is a key example),” he noted.

“Another likely driver of technology sector outperformance is cloud computing. Many diversified cloud businesses, such as Oracle and Citrix Systems, are included in our fund.

“And finally, the ongoing migration towards subscription models. In times past, consumers and businesses buying software and hardware would make one-off transactions, often at shops. For example, businesses buying Microsoft Office could buy the CDs one year from their local computer shop and then use that version of software for several years (“pay and leave”). These transactions were one-off and unpredictable. It required tech companies to start every year from zero. This made revenue and earnings harder to model.”

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