Investing in the new economy

BY Aditi Grover | 25 April 2017
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Once upon a time, not too long ago, you would have to wait 5 minutes to connect to your dial-up internet – once a family member had finally gotten off the phone! You would have to wait several days for your photos to be developed, taken by your Kodak disposable camera, only to find your eyes closed in most of the photos. You would’ve walked down to Video Ezy to rent a video and, then as times moved on, a DVD. And without a Google fact check you would have to believe the stats your dad told you about how many kilometres he (allegedly) walked to school. There is simply no doubt that technology has revolutionised our world.  Companies such as Apple, Google, Facebook and Netflix have become household names and are now intrinsically linked with how with live our everyday lives. These companies represent the New Economy.

Technology companies have evolved from creating new and niche consumer products to a group of companies upon which every industry has now become dependent on.

One clear example of this dependency is in the commerce space; where commerce is spelt with an “e”.  And there is no company more disruptive than Amazon. Amazon is an innovator that has disrupted the old retail economy on a global scale. The former book seller now accounts for more than half of every new dollar spent online in America and, with a market cap of $400B, it is the fifth most valuable firm in the world. Amazon has two principal businesses, e-commerce and Amazon Web Services (AWS), its cloud-computing arm.  However, due to its immense footprint it competes with multiple sectors including logistical companies, search engines, social networks, food manufacturers and producers of ‘physical, digital and interactive media of all types’. Its business model is almost a self-fulfilling prophecy. In its e-commerce business the more shoppers Amazon lures, the more retailers & manufacturers want to sell their goods on Amazon.  That gives Amazon more cash for new services – such as streaming of video & music which it gives away to loyal customers for free in order entice more shoppers.  92% of Amazon’s current value is based on profits expected after 2020, it appears investors are anticipating an extraordinary rise in revenue, from sales of US$136 bn last year to half a trillion over the next decade (source: ).

Apple is another example of a behemoth innovator in its own right. Apple pioneered the graphical user interface on personal computers, revolutionizing how humans interact with their machines. It then turned its attention to mobile phones. The iPhone’s ground-breaking combination of powerful apps, full web browsing, and all the media you could consume created an entirely new mobile experience for its customers whilst cleverly creating its own ecosystem by syncing all Apple devices. Approximately 3 billion people worldwide (as at 2015) use an Apple smart phone and the growth is expected to reach 4.7 billion by 2020. Much of this growth is expected to come from users of Android devices switching to an iPhone (this switch has reached record levels following the introduction of larger screen sizes in their newer iPhone models), the growth in emerging markets resulting in more middle class being able to afford an iPhone, Apple lowering its price point for an entry level iPhone and, by the monetisation of its own services as Apple owns its own platform (iOS operating system).

All this disruption and growth in the technology sector is starting to lead to higher profitability. Although profitability within the technology sector has already come a long way there is further evidence of the industry continuing to deliver value outside of the evolution of their innovative products & solutions. One of President Trump’s stated aims is to encourage more U.S firms to repatriate billions in profits they are holding offshore to avoid high U.S taxes. This is because the federal government taxes U.S. companies on all profits they earn globally at 35%. But there’s a caveat to this levy, if a company leaves foreign earnings in the nations where they were earned, either parked in cash or invested in plants, inventories research & development, the money is exempt from U.S. tax until it’s returned to the parent company as repatriated income. I.e. – Companies in the U.S would pay corporate tax at 35% vs in Ireland, a popular ‘haven’, at 12.5%.  This has a significant impact on the Technology sector in the US as its estimated $681 billion could be freed for dividends, share buybacks, and acquisitions as seen in the diagram below.

How can you get exposure to companies that represent the new economy?

The BetaShares Nasdaq 100 ETF (NDQ), gives Australian investors access to many of the world’s most innovative companies such as Apple, Facebook, Amazon, Netflix & Google. NDQ aims to track the NASDAQ-100 Index, and so it’s a cost-effective way to gain access to high growth potential global companies, with a strong focus on technology, and the opportunity to gain exposure to one of the world’s most traded indices. The NASDAQ-100 has performed strongly – the chart below shows the outperformance of the Nasdaq 100 in comparison to S&P 500 index over the last 12 years.

NASDAQ-100 Index v S&P 500 Index performance: January 2005 – 31 March 2017

 

Source: Bloomberg. Past performance is not an indication of future performance. The chart above shows the performance of the NASDAQ-100 Index v. the S&P 500 Index and does not into account fees or expenses associated with the NDQ ETF. You cannot invest in an index.

Other than potential performance, NDQ may also offer the benefit of adding diversification in your portfolio, which could potentially lower the return volatility of your portfolio. Typically investors have diversified through Asset Class exposures (such as Fixed Income, Shares, Property etc) but you can also fine-tune your portfolio by exploring global diversification within the context of your asset class exposures. The Nasdaq 100 index is heavily overweight Tech amongst other sectors, in comparison to both the S&P/ASX 200 and S&P 500 as seen in the table below. Furthermore, the sector’s price-to-earnings ratio at the end of January 2017 has remained below its long-run average.

Industry Breakdown by Index: 31 March 2017

How does NDQ compare to some of its peers?

As seen in the table below NDQ has outperformed its peers over the short and long term whilst also being the most cost effective solution.

Past performance is not an indication of future performance.

Additionally, the table below demonstrates that NDQ is also quite closely correlated in terms of its sector exposures to its peers (Correlation refers to the strength of the co-movement between two assets or portfolios (ranging from -1.0 or perfect negative correlation to +1.0 or perfect positive correlation).


So, in my view, NDQ can really help you to simply and cost-effectively invest in the new economy. If you’d like access to more information to BetaShares Nasdaq 100 ETF, click here.

4 Comments

  1. Peter Henderson  |  April 26, 2017

    Is there an Australian new economy beta shares fund

    I would like to support homegrown enterprises with an investment of $25,000

    1. Ele de Vere  |  April 27, 2017

      Hi Peter,

      Thanks for your reply, one of our client service team members will be in contact with you.

  2. Mark Hawkins  |  April 26, 2017

    Can I get more info on NDQ.

    1. Ele de Vere  |  April 27, 2017

      Hi Mark, please visit the NDQ Product Page for more information on this Fund.
      http://www.betashares.com.au/fund/nasdaq-100-etf/
      Thank you

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