Hello PNQI! Invest in Big Tech through this ETF

• Tech stocks are one of investor’s favourites, and here we introduce the Invesco NASDAQ Internet ETF (NASDAQ: PNQI) as an alternative to the ALPS O'Shares Global Internet Giants ETF (BATS: OGIG). 

• Each ETF has its benefits – OGIG would be suited for investors who wish to gain exposure to high growth names, while PNQI would be for investors who wish to gain exposure to profitable names. 

• Both offer exposure to Big Tech, but PNQI has a larger weightage with close to 40% exposure.

• All in all, depending on each investor’s needs and preferences, either of the ETF would be better suited.

Here we introduce the Invesco NASDAQ Internet ETF (NASDAQ: PNQI) as another investment opportunity for exposure to the Global Digital Economy, on top of the ALPS O'Shares Global Internet Giants ETF (BATS: OGIG) which remains on our ETF focus list.

While both ETFs provide exposure to the Global Digital Economy, the type of exposure varies. Unlike OGIG, PNQI has lower exposure to unprofitable companies and greater exposure to Big Tech names. This subtle difference in exposure may lead to a variation in the performance among these two ETFs, especially as we head into an environment where interest rates are rising and inflation is expected to stay higher for longer. 

Introducing the Invesco NASDAQ Internet ETF

The Invesco NASDAQ Internet ETF (NASDAQ: PNQI) seeks to track the performance of the Nasdaq CTA Internet Index, in which the ETF will invest at least 90% of its total assets in the index’s securities. The index is a modified market capitalisation weighted index that seeks to track the performance of the largest and most liquid companies that are engaged in internet-related businesses, and listed on one of the four major US stock exchanges. 

Figure 1: How companies are chosen to be included in the index

The index is also reweighted quarterly, where the maximum weight of any constituent is capped at 8%, and no more than five constituents are allowed to be at the cap weight. The remaining constituents are capped at 4% weightage. Excess weights are then redistributed equally across the constituents. 

Top holdings of the ETF include Google (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Disney (NYSE: DIS), Meta Platforms (NASDAQ: META), and Alibaba (NYSE: BABA). 

Figure 2: Top 10 holdings of the ETF and geographical exposure

PNQI vs OGIG: Different exposure mix to the Global Digital Economy

Although both the ETFs give exposure to the Global Digital Economy, the type of exposure varies. Firstly, the PNQI ETF has a lower exposure to unprofitable companies, while OGIG has a high exposure to software names (roughly 50%), and hence has more unprofitable companies (Figure 3). For example, OGIG contains names such as Snowflake (NYSE: SNOW), Palantir (NYSE: PLTR), and Crowdstrike (NASDAQ: CRWD), which are not found in PNQI.

Figure 3: PNQI has lower exposure to unprofitable companies compared to OGIG  

Secondly, PNQI’s lower exposure to unprofitable companies is also due to its higher exposure to Big Tech companies, most of which are profit-making (Figure 4). 

Figure 4: PNQI has close to 40% exposure to Big Tech (M.A.A.M and B.A.T.)

Given the difference in holdings, each ETF gives investors a different exposure and has its own set of pros and cons, which we lay out below. Hence, depending on each investor’s needs and preferences, either of the ETF would be better suited. 

Choosing between PNQI vs OGIG, or both

Firstly, investors with a greater risk appetite and wish to invest in high growth stocks with the potential to deliver outsized returns would find the OGIG ETF a better suit. For example, OGIG gives a large exposure to enterprise software names (Table 1), which although many are currently unprofitable, have attractive long-term growth drivers such as the digital transformation of enterprises. 

Some of the digital transformation drivers for the software industry include the shift of workloads onto the cloud, Internet-of-Things, factory automation, and autonomous vehicles, etc. Nevertheless, investors have to be prepared for the risk that certain growth stocks might never turn profitable. 

Related article: Digital Economy: Long-term growth intact, but limited upside

Table 1: OGIG portfolio breakdown

On the other hand, investors who wish to have less exposure to unprofitable names, and higher exposure to Big Tech companies should prefer the PNQI ETF. 

A benefit of having greater exposure to Big Tech is that these companies have a strong moat in their respective fields, with strong business models that give the companies a strong long-run competitive edge to weather near-term turbulences with earnings resilience. 

Moreover, in the current macroeconomic environment where growth is slowing as the economy is hit from multiple fronts including the Russia-Ukraine war, US-China trade tensions, global supply shortages, and more, it is important to identify quality businesses with sustainable earnings and strong balance sheets that can weather the storm (especially if a recession occurs).

Additionally, in this rising rate environment, investors have been rotating away from high growth stocks, as they are less willing to pay such high multiples for companies with uncertain future profits and cash flows. Instead, investors have been shifting to companies that possess stable earnings but lower growth, i.e Big Tech. (Figure 5)

Figure 5: Big Tech names have generally held up as compared to growth stocks

Finally, because many of these high growth companies are trading at lofty valuations, they are more likely to experience a larger valuation de-rating, as compared to Big Tech names in the event of a market downturn (Table 2).  

Table 2: Software names have much higher valuations and have experienced more significant de-rating in 1H22

All in all, while OGIG provides investors exposure to high growth stocks with the potential to deliver above market returns, investors must be aware of the risks of investing in such companies, especially during a time such as now. On the flip side, PNQI – with its greater exposure to Big Tech names could be a safer place to be given the current macroeconomic environment.

PNQI and OGIG each have their benefits

Aside from the higher exposure to Big Tech and profitable companies, PNQI also ranks well among its peers when put through our ETF selection methodology. While it is slightly more expensive compared to OGIG in terms of the expense ratio – 0.48% for OGIG vs. 0.60% for PNQI – PNQI makes up for it by having much better liquidity, as can be seen from its higher trading volume and tighter bid-ask spread (Table 3).  

All else equal, ETFs with better liquidity are often more desirable as they allow investors to enter or exit a position with minimal impact on the price, thus lowering the implicit costs of trading. 

Table 3: The Invesco NASDAQ Internet ETF stacks up well against its peers.

In conclusion, both ETFs have their benefits. The ALPS O'Shares Global Internet Giants ETF (BATS: OGIG) would be more suitable for investors who are seeking higher returns through exposure to high growth names, while the Invesco NASDAQ Internet ETF (NASDAQ: PNQI) would be a better option for investors who wish to gain exposure to Big Tech companies, which are likely to be more resilient in a downturn. 

Additionally, investors who are seeking pure-play exposure to China Tech, particularly H-shares, can consider the iShares Hang Seng Tech ETF (HKEX: 3067).

Related article: Quick take: China Tech delisting risks possibly fading

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in iShares Hang Seng Tech ETF