Mirae Asset has come out with a NFO of NYSE FANG+ ETF and a fund of fund (FOF) with the same underlying ETF. This ETF closes on April 30th while the FoF offer closes on May 3. Both will be available for investing afresh later.
We’re writing this note on the NFO following queries from some of you on whether to invest in one of these.
The NYSE FANG+™ Index is an equal-dollar weighted index listed in the NYSE. It is a portfolio comprising of stocks of 10 high-growth companies in the technology and tech-enabled sectors, media & communications and consumer discretionary sectors that are highly traded. The ‘plus’ FANG+ indicates that it has 5 additional stocks other than the classic FAANG combo of Facebook, Apple, Amazon, Netflix, and Alphabet’s Google. The portfolio details are given below.
The index is rebalanced quarterly for the constituents and weights (as weights tend to move away from their equal weight positioning with stock moves).
Factors determining returns
There are broadly two factors that drive your returns in any foreign equity investment. One, the risks relating to the market in which you invest (US in this case) and two, currency fluctuation. The former is true of any market you invest in, including the local market. However, currency fluctuation adds another layer to this risk. Fortunately, for Indian investors, as the rupee has traditionally depreciated against the dollar, global equity investment has largely worked in their favour.
Data below (source: AMC presentation) will tell you the superior returns delivered by investing in MSCI USA index in Indian rupees as opposed to MSCI USA dollar index. This is because every dollar invested there would have returned more rupees as rupee value depreciated over this period. The rupee’s depreciation against the dollar is higher than the former’s slide against a currency like the Euro.
Your choices and how NYSE FANG+ index compares
We’ll not get into the benefits of investing in global markets as we have already discussed about it in this article by Aarati.
We have also stated in our earlier reports that our preferred market is the US for the following reasons:
- global giants are listed there even if they have presence in other countries
- it has companies that are unique and innovative – options that are not available in India.
- the market has depth and unique options in the passive space
- It has lower correlation with our market. Given below is some data from the AMC on correlation. You will see that Indian has a lower correlation with the US market.
At present, Indian investors wanting to invest in US indices through local ETF/FoF route have the Nasdaq 100 and S&P 500 options. We are not getting into the active US fund options in India simply because they haven’t beaten the indices consistently and are relatively higher on cost. While those options may seem to have ‘returned well’ (as many of you stated in the case of Franklin US Opportunities fund) most of you would not have compared them with broad index returns in rupee terms to know if they are your best choices.
#1 High performance index but volatile
Now, coming back to the latest offering – the FANG+ index is a powerful portfolio of high growth stocks. So, it should hardly come as a surprise to you that it outperformed a broader high-growth index the Nasdaq 100 (data below gives the comparison of returns in rupee terms over shorter and longer time frames. Source AMC presentation).
We tried rolling the returns (dollar terms) of the 3 indices, NYSE FANG+, Nasdaq 100 and S&P 500. The data below will tell you that while NYSE FANG+ beats its peers by a mile, the volatility, measured by standard deviation, is also quite high. Over rolling 1-year return periods, while the NYSE FANG+ beat the Nasdaq 100 over 80% of the time, in the 20% period it underperformed, it lagged Nasdaq 100 by a good 11 percentage points on an average. In other words, when it falls, it can fall hard.
#2 Expensive basket
The Nasdaq 100, which is considered as an expensive growth index, trades at about 40.4 times trailing earnings while the broader S&P 500 is at 32.5 times. The FANG+ index beats them both with an expensive P/E of 54 times (source: Bloomberg). Of course, when a stock like Tesla or Twitter do not have any meaningful PE, this metric may not provide much light. But suffice to note that it is the more expensive than the expensive Nasdaq stock portfolio. Much of the valuation is afforded to the earnings potential arising from newer lines of business and services for most of these companies, capacity for geographic expansion, and potential disruption in technology.
#3 High Concentration & risks
Amazon is under scrutiny for labour practices and monopolistic behaviour. Alibaba may face domestic issues in China. All these can either impact the fortunes of these companies or cause sharp swings in the stock prices, reacting to negative news now and then. That these companies try to reinvent themselves every time these risks materialise, is where the story may ultimately lie.
8 out of the 10 stocks in FANG+ (Twitter and Alibaba are not in Nasdaq 100) are available in the Nasdaq 100. These stocks account for about 80% of FANG+ but just 38% of Nasdaq 100.
The FANG+ has index futures precisely for this reason of being a high volatile/concentrated portfolio. In fact, the index is popular for taking trading positions and hedging risks.
Should you invest?
The performance of FANG+ cannot be ignored, risks notwithstanding. But what you need to be aware is that the index has been built to capture a rising theme. The index was launched only in 2017 (with back tested data since 2014) and is built to primarily trade on the FAANG stocks as a basket. It therefore appears that the index is best used as a trading opportunity for traders than an option for only long-term investment. How long this theme will last in the way it does is too early to assess. That the theme holds potential is undeniable.
The offering from Mirae therefore needs to be treated like a high-risk thematic fund if you have very high-risk profile – and only if you are particularly enamoured by the FAANG theme. Periodic profit booking will also be necessary.
For those of you who already use a US stock trading platform, this can be skipped. If your objective is diversification of markets and hedging your portfolio from rupee depreciation, then we think the other 2 passive US index funds work better with lower risks. Our choice, for diversification, would be the less volatile passive options. Our recommendations are available in Prime Funds under thematic/strategic investing.
Please note that as an international fund, this ETF/FoF will be treated like a debt fund for tax purposes.