ETFS Morningstar Global Technology ETF
ASX Code: TECH
ETFS Morningstar Global Technology ETF (ASX Code: TECH) offers investors exposure to global technology companies encompassing hardware, software and IT services.
TECH aims to provide investors with a return that, before fees and expenses, tracks the performance of the Morningstar Developed Markets Technology Moat Focus Index. TECH uses a full-replication strategy to track the index, meaning that it holds all of the shares that make up the index closely in proportion to their index weights.
The index comprises of 25 to 50 global technology companies across areas such as software, semiconductors, data processing, computer equipment and databases. Companies are screened using Morningstar’s proprietary moat methodology, to include only those companies that are identified as possessing strong competitive advantages relative to their peers. Further, companies are selected for the index on the basis of how attractively they are priced relative to their fair value, as evaluated by Morningstar’s team of equity analysts.
The methodology employed by Morningstar in calculating the index can be found, here.
Why consider TECH
Simple, low-cost sector access to global technology.
Exposure to a sector that is underrepresented in the Australian domestic market.
Access to stock selection driven by Morningstar’s proprietary research.
TECH invests in the technology sector as defined by the Morningstar Global Category Classification, which includes companies that generate their revenue from hardware, software and IT services.
Investors should note that some high profile companies, like Amazon and Facebook, that have a heavy technology association to their products or services belong to other sectors because their revenue does not come directly from the sale or licensing of their technology. They are therefore not included in TECH.
The index is comprised of two sub-portfolios, each consisting of 25 stocks. One of the sub-portfolios is alternately rebalanced each quarter and the stocks are equally weighted. The total number of stocks in the index depends on the degree of similarity between the two portfolios; a minimum of 25 stocks if the portfolios are identical and a maximum of 50 stocks if no companies are in both portfolios. This approach is taken to reduce company-specific risk and at the same time avoid excessive portfolio turnover.
The choice of an equal weighting scheme seeks to provide investors exposure to the overall sector and allow all stocks to contribute equally to returns. Large-cap stocks do not dominate as they do where holdings are weighted by market capitalisation.
The maximum weight of an individual country in the index is capped at 10% plus its corresponding weight in the benchmark, or 40%, whichever is higher. Maximum Country Weight = Max (40%, benchmark weight + 10%).
An economic moat, like a physical moat, represents the degree to which a company has built a competitive advantage around its business. This can be in terms of intangible assets, costs of switching to alternative providers, network effects, input cost advantages or efficiencies of scale. The extent to which a company holds some, or all of these, helps define how robust that company is viewed to be relative to its competitors and whether it is assigned a wide, narrow or no Morningstar Economic Moat Rating. The index is comprised exclusively of companies identified as having wide or narrow moats.
TECH can be used as a core exposure to the global technology sector and can aid portfolio sector diversification via investment in a sector that is underrepresented in the Australian market.
TECH may also be used as a tool for expressing long-term strategic or short-term tactical views on the technology sector.
For those using a core-satellite investment approach, TECH can be used in either core or satellite. It is differentiated from market capitalisation weighted strategies by its research-focused, value-oriented approach to stock selection.