Mutual Funds

Do Mirae Asset FANG+ funds have the bite?

Kumar Shankar Roy BL Research Bureau | Updated on April 24, 2021

USP of these new offerings is high concentration, hence it’s for investors with high risk appetite

Mirae Asset Mutual Fund has launched India’s first FANG+ based products. These are in the form of Mirae Asset NYSE FANG+ ETF, an open-ended exchange traded fund tracking the NYSE FANG+ Total Return Index and Mirae Asset NYSE FANG+ ETF Fund of Fund (FoF), an open-ended FoF predominantly investing in the FANG+ ETF. The new fund offer period for the ETF will close on April 30 while that for the FoF, which facilitates systematic investments, will close on May 3.

FANG fundas

Mirae’s offerings are an opportunity for Indian investors to take focussed exposure in global innovation and disruption leaders across social media, e-commerce, products, streaming, search engines, electric vehicles, computer graphics and online shopping.

FANG refers to four highly-popular US tech stocks: Facebook, Amazon, Netflix, and Google’s parent company, Alphabet. In 2017, Apple was added to the group, which then became FAANG. The NYSE FANG+ index, which forms the basis for Mirae’s new passive products, is a less than four-year-old equal-weight basket representing a minimum of 10 technology and consumer discretionary sector stocks. FANG+ at present contains ‘FAANG’ stocks and Tesla, Twitter, Alibaba, Baidu, and Nvidia. These are ‘high-growth’ tech stocks, in market parlance. Each stock has a 10 per cent index weight, which is allowed to drift between quarterly reset dates.

According to data shared by the fund house, the combined annual revenue of these 10 companies, at USD 1.09 trillion, is three times the Indian government’s total receipt (FY2019-2020).Their combined annual net profit at USD 179 billion exceeds net profit of all Indian equities.

NYSE FANG+ Index has historically outperformed S&P 500 and NASDAQ 100 by a considerable margin over 1-, 2- and 3-year periods. Also, the index has exhibited a low correlation of 0.15 with Nifty 50 on a rupee-denominated basis. Prospective investors should guard against hindsight bias creeping in, especially when looking at recent performance. Most companies of FANG+ index trade between 20-90 times trailing twelve-month profits. The trailing PE for Tesla is much higher due to marginal profit while Twitter is still loss-making. Twelve-month forward P/E numbers, however, for all the 10 stocks are lower.

Points to remember

Mirae FANG+ ETF and FoF are an attractive proposition on many counts. One, they fulfil the need for Indian investors to look beyond India for diversification. Two, they offer a wider canvas in terms of high-growth potential tech stock opportunities. Three, investing in dollar-denominated stocks helps convert the challenge of rupee depreciation into an investing opportunity to earn better returns. Additionally, the new offerings aim to provide passive international exposure at low cost. At present, existing US offerings in the MF space have expense ratios between 0.5 per cent and 2.4 per cent.

There is a flipside too. Firstly, compared to S&P 500 and Nasdaq 100, the NYSE FANG+ index has seen bigger declines and delayed recoveries. The equal-weight nature of the index also makes it highly volatile due to a lower number of stocks (10). Secondly, the Mirae ETF tracks the index and the FoF tracks the ETF, so the liquidity of the ETF will have a bearing on the NAV of the FoF (FoF will buy units at the price of the ETF). Since the products are new, one would have to watch how the price-NAV deviations play out.

Thirdly, existing US funds already provide a way to play tech stocks. There are US technology equity FoFs, and index ETFs based on NASDAQ 100, not to mention diversified US-focussed schemes. The USP of the Mirae offerings is high concentration, making them suitable for investors with high-risk appetite.

Another risk investors need to watch out for is the valuation of stocks. For instance, there will be 10 per cent exposure to a company such as Apple which is trading at around 29 times one year forward EPS, while long-term EPS growth is likely to be in high single to low double digits. There will also be a 10 per cent exposure to Tesla which, according to some market experts, is trading at bubble valuations. Additionally, investors should bear in mind that since many of these 10 stocks enjoy monopoly status, there could be potential overhang in terms of anti-trust cases.

Published on April 24, 2021

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