Why now is a good time to buy Mirae FANG+ ETF

After a swashbuckling three-year period of robust gains, the tables have turned on US technology sector forcing it to taste gravity in 2022. Year to date (YTD), NASDAQ 100 index has lost 28 per cent as the easy-money fuelled stock market dash came to a screeching halt. The cuts in much-loved tech stocks are deeper, with Meta (Facebook) down 66 per cent YTD, Netflix (down 52 per cent), Amazon (down 44 per cent), Alphabet (Google) down 32 per cent showing the seller’s fury.

The sudden about-turn in tech stock perception, cheaper valuations and business prospects largely remaining intact over the long term offers an attractive opportunity for contrarian investors to slowly build positions in high-growth tech stocks. Investors with high-risk appetite can start regular investments or SIPS in Mirae Asset NYSE FANG+ ETF, which tracks a concentrated 10-stock basket in the form of NYSE FANG+ Total Return Index. The ETF has lost over 30 per cent YTD, making it the third-worst international fund.

Investors, however, need to have at least a three-year perspective before investing. Economic issues in the US and developed markets will take a while to unwind and markets may not have bottomed out yet.

In our bl.portfolio edition dated October 16, we have recommended investors with relatively lower risk appetite to do SIP in more diversified NASDAQ-focussed funds.

FANG+ fundamentals

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

FANG refers to four highly-popular US tech stocks: Facebook, Amazon, Netflix, and Google (Alphabet). In 2017, Apple was added. Microsoft, Tesla, Alibaba, Baidu, and Nvidia are also part of the larger grouping. The NYSE FANG+ index, which forms the basis for Mirae’s ETF, provides exposure to these highly-traded tech giants. Each stock has a 10 per cent index weight, which is allowed to drift between quarterly reset dates.

Even after the drop in 2022, the FANG+ index has returned a 20.22 per cent annualised total return from September 19, 2014, to October 31, 2022, as compared with 14.60 per cent for the NASDAQ-100, 10.47 per cent for the S&P 500 and 17.61 per cent for the S&P 500 IT index.

The correction in tech sector has made the valuations picture sober. Companies of FANG+ index trade between 10 and 90 times trailing 12-month profits. The biggest PE ratio corrections have happened in Meta Platforms (from 25 times to 10.5 times) and Netflix (from 61 times to 30.4 times), the trailing PE for Amazon at 94 times seems high, but it has fallen from 132 times. Similarly, NVIDIA’s PE ratio has fallen from 118 times to 58 times now. Twelve-month forward P/E numbers for most of the 10 stocks are lower.

Our take

Mirae FANG+ ETF fulfills the need for Indian investors to look beyond India for diversification and offers a wider palate in terms of high-growth potential tech stock opportunities. Many of these companies are leaders globally in their space. They are also way ahead of the rest of the world when it comes to working on, or are exposed to, tech themes that can become mega trends of the current decade such as autonomous cars, big data and analytics, augmented/virtual reality, metaverse etc. Additionally, investing in dollar-denominated stocks also makes rupee depreciation a tail wind.

Do note that the equal-weight nature of the index makes it highly volatile due to it being based on just 10 stocks. There is also risk from exposure to Chinese stocks in the ETF (Alibaba and Baidu) due to the regulatory and economic issues there, although it’s tempered by the fact that the shares have already corrected reflecting these concerns.

Mirae Asset NYSE FANG+ ETF provides passive international exposure at low cost (0.7 per cent) compared with over 1.20 per cent for some actively-managed US funds.

Most importantly, the trading volumes of Mirae FANG+ ETF on domestic bourses should be monitored before buying. The FoF is closed for subscription now due to regulatory limits. Hence ETF is the only route to gain exposure to this block of technology shares now. As per latest data, the daily traded volume of this ETF on NSE is 7.3 lakh shares and traded value is ₹2.8 crore. Impact cost is low at 0.13 per cent. As long as the market makers are able to manage the trading volumes, ETF price deviation from NAV should be minimal and investors will be able to buy. This is an important factor given the frequent restrictions placed by fund-houses in terms of inflow receipts for international funds.

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