The Nasdaq 100 ETF – Tick several boxes | BetaShares

The Nasdaq 100 ETF – Tick several boxes

BY Peter Harper | 31 May 2016
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Whilst every investor is different, there are 5 common themes we hear from many investors on an ongoing basis. They are the desire to:

  1. Increase the diversification of portfolios
  2. Get exposure to growth in a “low-growth” world
  3. Get exposure offshore
  4. Reduce exposure to the Banks and Materials Sectors in Australia
  5. Maintain a keen focus on valuations after a long (but challenging) “Bull Market”

I would argue that there is a very simple way to potentially ‘tick all these boxes’ via a single trade in the NASDAQ-100, which can be accessed via the BetaShares NASDAQ-100 ETF (Ticker: NDQ)

In the U.S. Market, their NASDAQ-100 ETF is one of the most popular ETFs by both Value Traded and Assets Under Management (AUM). The US NASDAQ-100 ETF:

  • Ranks #3 of all U.S. listed ETFs by value traded (in the last year)
  • Ranks #7 of all U.S. listed ETFs by AUM @ ~US$38bn

In the post below, I set out some ways in which NDQ may help benefit your investment portfolios:

Diversification via the NASDAQ-100 Index: More of what you may want and less of what you may not

The table below shows how blending the S&P/ASX 200 (to represent Australian share portfolios) with the NASDAQ-100 Index (in a 60% S&P/ASX 200: 40% NASDAQ-100 Index blend) creates a much more balanced sector exposure which:

  1. Reduces exposure to Financials by 40% relative to S&P/ASX 200 alone (because the NASDAQ-100 has no financials)
  2. Reduces exposure to Materials by 40% relative to S&P/ASX 200 alone (because the NASDAQ-100 has no materials)
  3. Significantly boosts exposure to Information Technology relative to S&P/ASX 200 (giving exposure to companies like Apple, Microsoft, Facebook, Google, Intel, Baidu, Citrix)
  4. Significantly boosts exposure to Consumer Discretionary relative to S&P/ASX 200 (giving exposure to companies like Amazon, Paypal, Netflix, Tesla, Ebay, 21st Century Fox, Expedia, Tripadvisor)
  5. Boosts exposure to Healthcare by 136% relative to S&P/ASX 200 alone (giving exposure to companies like Gilead, Amgen, Celgene, Biogen)
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 A growth story: Access to the ‘new industrials’

Another benefit to using NASDAQ-100 for diversification is its exposure to the “New World” economy After all:

  • How many businesses these days advertise on TV, but not Google?
  • How many people do not use Microsoft products every day? Outlook for email, PowerPoint for presentations, Excel for Spreadsheets, Word for documents?
  • How many consumers utilise a phone book to find a business rather than Googling it on their Apple Smartphone?
  • How many people do you know who are not at least considering moving to Netflix?

Not many!

These businesses are not going away… and some commentators are now referring to these businesses as the “new industrials” forming the foundation of the world economy.

The earnings growth of the companies in the NASDAQ-100 Index is impressive relative to the S&P 500 as can be seen below:

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We can see here that NASDAQ-100 Index earnings have grown at a compound annual growth rate of 23% p.a. since 2003, relative to S&P 500 earnings growing at just 8.5% p.a. over the same period.

Dividend growth has been even more impressive, with NASDAQ-100 dividends growing at almost 4 times the rate of S&P 500 dividends.
Valuation: NASDAQ-100 appears reasonably priced

Valuation is yet another area where the NASDAQ-100 Index stands out relative to S&P 500 and MSCI World

Below is the performance (p.a.) and P/E expansion numbers for all 3 exposures from 1 Nov 2010 to 22 April 2016:

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Table shows performance of Index, not ETF performance and does not take into account ETF management costs. You cannot invest directly in an index. Returns for periods longer than one year are annualised. Past performance is not an indicator of future performance of index or ETF.
These numbers suggest that over the rally of the last few years, the NASDAQ-100 Index has remained cheaper relative to earnings than both S&P 500 and MSCI World.How is it that NASDAQ has beaten both S&P 500 and MSCI World convincingly not only on performance, but also with the lowest P/E expansion over the last ~5.5yrs?

Simply, it all comes back to the earnings! As we saw earlier, the companies constituting the NASDAQ-100 Index have been generating top line earnings growth that over many periods has often exceeded the price appreciation of the index. This is shown below:

As we all know, when earnings grow faster than price, P/E ratios decline. And this can be clearly seen in the chart above. For comparative purposes, it is also worth noting that many of the companies in the NASDAQ Consumer Discretionary space utilise technology to simplify and scale their business in much the same way as say the Australian market darling Domino’s Pizza, yet can be accessed for an index P/E less than 1/3 of that of Dominos currently.

Summary

Exposure to the NASDAQ-100 Index via the BetaShares NASDAQ-100 ETF (Ticker: NDQ) through a simple trade on the ASX may help optimise the portfolios of many investors by:

  1. Improving the global and sector diversification of portfolios
  2. Providing exposure to better growth track records in a “low-growth” world
  3. Getting investment dollars offshore
  4. Reduce exposure to the Banks and Materials sectors in Australia whilst boosting exposure to world leading businesses in the fast growing Information Technology, Consumer Discretionary and Healthcare sectors that are so under-represented in Australia
  5. Providing attractive valuation fundamentals relative to alternatives For further Information, please see the links below:

Factsheet for NDQ

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