Thesis
Big tech and AI have been the dominant themes of 2023, with the so called “Magnificent Seven” rallying hard. These companies dominate their sectors and appear to have a long runway for growth ahead of them. Investors who want to gain pure exposure to big tech can do so through the MicroSectors FANG+ ETN (NYSEARCA:FNGS).
March of the MAG7
The dominance of the so called “Magnificent Seven” has been the story of 2023, with the group powering much of the gains in indexes.
The issue for passive investors is that when they gain exposure to the MAG7 companies they also gain exposure to smaller firms and unprofitable firms, which may be undesirable. Enter FNGS. This ETN gives investors a way to gain pure exposure to the big tech theme. This is useful for investors who want to buy these companies in an exchange traded product without gaining exposure to other smaller companies that would typically be included in a “tech ETF” such as QQQ.
MicroSectors™ FANG+™ ETN
The investment objective of the MicroSectors FANG+ ETN is to give 1x exposure to the FANG+ Index. According to MicroSectors:
The NYSE® FANG+™ Index includes 10 highly liquid stocks that represent industry leaders across today’s tech and internet/media companies. The index’s underlying composition is equally weighted across all stocks, providing a unique performance benchmark that allows for a value-driven approach to investing. While the performance of indices weighted by market capitalization can be dominated by a few of the largest stocks, an equal-weighting allows for a more diversified portfolio.
FNGS rebalances quarterly to be equal weight. FNGS will always hold 10 stocks. The current holdings of FNGS are Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), Meta (META), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA), Advanced Micro Devices (AMD), Snowflake (SNOW), and Netflix (NFLX).
Microsectors
This ETN is for those who want exposure to not only the traditional “Tech 5” but also fast growing companies with a lot of momentum behind them such as Nvidia and Tesla.
The Current Investment Case
Big tech is poised to benefit from AI adoption and the continued growth of the internet. By investing in FNGS investors gain pure play exposure to many of the largest tech companies that are dominating their respective fields and have years of growth ahead of them.
Apple: While growth has slowed in recent times the company is continuing to grow their subscription revenues and install base. Expanding their presence in India and their newly unveiled VR headset may turn out to be new growth drivers for the company. In the meantime Apple continues to improve the efficiency of their operations and buy back shares at an aggressive rate.
Microsoft: Microsoft is making massive investments into computing and software in order to effectively serve their enterprise customers in a shifting tech landscape. The company is continuing to grow operating income at a high clip and is positioning themselves for another decade of success thanks to AI and the demand for computing/software.
Alphabet: While Google relies heavily on ads, the company is priced attractively at these levels. YouTube remains an incredibly valuable property and becomes more entrenched by the day. The company is continuing to ramp their cloud computing and AI efforts. Their other bets unit may one day bear fruit and provides optionality to the company.
Amazon: Amazon continues to be the premier cloud provider and is continually improving their operating efficiency. As the ads business ramps up it will provide a source of high margin growth for the company. Amazon is a relatively diversified business with a lot of levers for growth and is positioned to do well in an environment of increasing demand for computing. The company may be able to reduce their massive fulfillment workforce as robotics and AI improves.
Meta: Many investors have doubted the company’s focus on the metaverse, but their core business is proving resilient. AI implementation may help the company become more efficient and increase their already high operating margins.
Nvidia: The arms dealer of the AI race, Nvidia is benefiting immensely from the AI gold rush. The company provides both hardware and software that is integral to building, training, and operating AI models/applications. The company has been particularly active in the private investing space and could end up fostering the next wave of tech unicorns.
Tesla: Tesla is dominating the competition and has a large amount of optionality built into the shares. Their potential future growth drivers such as autonomy and robotics could provide massive upside to the company. Even if none of these end up panning out the company is still positioned well to succeed as more automakers transition to EVs.
Snowflake: Snowflake has an effective sales team and has done well in the land phase of “land and expand”. Now is the time for the company to focus on the expand phase and begin creating additional value for their customer base through new tools and offerings.
Advanced Micro Devices: AMD is helping to fill the enormous demand for compute. Even though some investors view AMD as being miles behind the competition, we believe that the company has a strong culture and that their flexible approach to chip architecture and design will be valuable going forward.
Netflix: Netflix is widely considered to be the winner in streaming, and their recent changes to password sharing may result in increased profitability.
While some of these companies will inevitably falter, the key is that they are poised to do well in aggregate. For this reason, we believe that FNGS will outperform the major indexes over the next decade.
FNGS has an expense ratio of 0.58%. This expense ratio may be viewed as being unreasonably high by some investors, especially considering the low amount of positions that the ETN holds. Investors that do not wish to pay these expenses can by all means buy the holdings of FNGS individually and equal weight them if they see fit.
FNGS does not pay a dividend and will likely never do so.
When an exchange traded product is made up of such few companies the natural question to ask is why not buy all of these companies individually. The answer in this case is two-fold. Firstly, an investor may not want to go through the hassle of rebalancing their holdings to be equal weight each quarter. And secondly, the ETN is not static and the index it tracks will adjust holdings periodically to best reflect what they believe “Big Tech” to be.
Price Action
FNGS has beaten both the Nasdaq 100 (QQQ) and S&P 500 (SPY) in 2023. Additionally, we can see that since late 2019 the FNGS ETN has beaten both indexes by a healthy margin. We believe the dominance of FNGS’ holdings will continue and that the ETN will outperform the major indexes going forward.
Risks of ETNs and Swaps
FNGS holds swaps and is an exchange traded note. These factors introduce risk. These risks include counterparty risk, liquidity risk, and operational risk.
Counterparty Risk:
Counterparty risk refers to the risk that one party in a swap agreement will default on its obligations, resulting in a loss for the other party.
Liquidity Risk:
Liquidity risk is the risk that a party may not be able to unwind or exit a swap position at a reasonable price due to insufficient market liquidity.
Operational Risk:
Operational risk includes risks related to errors, fraud, system failures, and other operational issues that can disrupt the execution and settlement of swap transactions.
We would like to direct investors to this article if they are interested in reading more about the risks associated with ETNs. The main thing for investors to understand is that these products carry risks that can lead to nasty surprises in the future. It’s up to an investor to determine for themselves if the risks are worth it.
In addition to the ETN and swap risks there is also the risk of concentration. FNGS is heavily concentrated in a select few names. This makes the ETN prone to sharp drawdowns if a few of their holdings have a large decline in value. FNGS is not diversified and an investor should have a high tolerance for risk if they intend on making an investment in the ETN.
Key Takeaway
FNGS gives passive investors a way to gain pure play exposure to the theme of big tech. The ETN carries risks associated with the investment vehicle and how they take their positions. That being said, if the dominance of big tech continues it’s likely that FNGS will continue to outperform the market.
Read the full article here
