If you wish to succeed in life, make perseverance your bosom friend, experience your wise counselor, caution your elder brother, and hope your guardian genius. − Joseph Addison
Way back in May 2020, when iShares Expanded Tech-Software Sector ETF (IGV) hovered around $240, I had opined that it has the potential to soar much higher. That has paid off big – IGV is now quoting around $326 as of November 23, 2020. That’s about 35% appreciation inside of 6 months.
Well, at that time, techs powered ahead because of the COVID-19 disruption. The situation has evolved today. There is clarity on a safe and effective vaccine, and the Democrats have won the elections.
However, many tech investors are nervous because they expect President-elect Joe Biden to clamp down hard on big tech. The House Judiciary’s tech antitrust report too suggests a wave of changes, and then, there is the danger of the tax cuts being rolled back – at least to some extent.
So, yeah, a sword does dangle above tech’s head, but I’m guessing it is likely made of plastic. It may cause a lump on the head, but not the kind of damage that investors fear. Here are the reasons why:
IGV mainly invests in software companies in the technology and communications sectors, and unlike many ETFs, its focus is not on big tech stocks. So, if the new administration turns the spotlight on big tech companies, IGV is not likely to be adversely impacted.
Image Source: IGV’s website
As of November 20, 2020, about 55% of IGV’s assets are invested in 10 companies, most of which enable cloud-based workplace productivity. These include Salesforce.com (CRM), Adobe (ADBE), ServiceNow (NOW), Intuit (INTU), and Oracle (ORCL), among others. IGV also has invested about 8% of its assets in Microsoft (MSFT), a big tech company.
The thing about big tech stocks is that they have appreciated too quickly. By August 2020, five big tech companies had zoomed so much that they contributed a whopping 20% of the S&P 500’s (SP500) market capitalization. That is an unhealthy trend that narrows the market and makes the stocks vulnerable to news.
Image Source: My Twitter Feed/The Lead-Lag Report
IGV’s portfolio is sufficiently “non-controversial” and, therefore, de-risked, and only a tax cut rollback can dampen sentiment and cause a dent in its NAV.
Image Source: IGV’s website
If you had invested $10,000 in IGV since its inception in 2001, you would be sitting on about $69,000 today. However, the majority of its gains occurred between 2018 and 2020 (see the image above), and a heck of a lot of gains accrued on account of the COVID-19 disruption.
The question now is how much steam is left in the tech sector after such a wild ride? I would say the sector looks good in the long term, but can react in the near term. A lot will depend on the policies announced by the new administration.
Dividend History and Peer Comparison
Image Source: IGV’s Dividend Growth Record
IGV is a growth ETF that offers a poor TTM dividend yield of 0.38% − it is not designed for income investors.
IGV’s peers include SPDR S&P Software & Services ETF (XSW), Invesco Dynamic Software ETF (PSJ), Invesco Dynamic Media ETF (PBS), First Trust DJ Internet Index ETF (FDN), and iShares North American Tech-Multimedia Networking ETF (IGN).
Image Source: IGV Peer Comparison
From a 5-year point of view, IGV and PSJ have outperformed the rest by a wide margin (check the image above). On a year-to-date basis, IGV and FDN have performed on par leaving the others behind. The 3-month and 6-month price performances suggest that IGV’s price momentum lagged XSW’s, PSJ’s, and PBS’s. That may be because the other funds may have focused on big techs while IGV was focused more on workplace productivity. Anyway, peer comparison suggests that IGV performed fairly well over the long term, but lagged in the short term.
I was extremely bullish on IGV in the middle of the COVID-19 disruption and rated it as a buy in May 2020. Well, things have changed today, and though it will take a long time to deliver and inject the vaccine, there is clarity that the disruption will end in 2021.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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