Vertigo3d
Introduction
We last covered iShares Global Technology ETF (NYSEARCA:IXN) in April 2020. We suggested at that time to start building a position despite the significant market correction due to the pandemic. We also noted the strong long-term growth outlook for IXN in the upcoming few years. The fund has since delivered a total return of 141%. Now that it has been nearly 4 years since we wrote our analysis, we think it is time to revisit this fund again.
ETF Overview
IXN owns a portfolio of global large-cap technology stocks. The fund seeks to track the S&P Global 1200 Information Technology Index. Unlike many ETFs that only tracks U.S. technology stocks, IXN also include stocks outside of the United States. The fund should continue to benefit from several important technological megatrends in the upcoming decade. The Federal Reserve’s possible dovish monetary policy in 2024 may also act as tailwind to many non-U.S. technology stocks in IXN’s portfolio. Although downside risk is high in major corrections such as during economic recessions, we think these corrections do create good buying opportunities. Therefore, we suggest investors to own this fund for the long run.
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Fund Analysis
IXN has rebounded strongly since October 2022
Let us first review how IXN has performed in the past few years. IXN has been on a rollercoaster ride in the past few years. The outbreak of COVID 19 caused a significant correction in early 2023, but this correction soon reversed and IXN’s fund price reached an all-time high towards the end of 2021 and early 2022. However, as soon as the Federal Reserve reversed its monetary policy to combat inflation, IXN fell sharply for most of 2022 and reached a near-term bottom in October. Fortunately, the market has since rebounded strongly and gained over 69% to reach a new record high. It now trades at $71.29 per unit.
Strong growth potential thanks to several important megatrends
Tech industry has been under inventory correction since early 2022. The good news is that we are now near the end of this inventory correction. While demand for many technology products such as PC and smartphones remain weak in the near-term, we suggest investors to look beyond any near-term weaknesses. Technology stocks will continue to benefit from many important technological megatrends. These trends include artificial intelligence, AR/VR technologies, Internet of Things, AIoTs, metaverse, electrification of vehicles, autonomous driving, edge and cloud computing, industrial automation, etc.
In the hardware front, we noted that about 30% of stocks in IXN’s portfolio belong to the semiconductor sector. The megatrends noted above will result in much higher semiconductor content in devices and hence semiconductor stocks will benefit greatly. In fact, Precedence Research projects global semiconductor market size to grow from $591.8 billion in 2022 to 1883.7 billion in 2032. This represents a compound annual growth rate of 12.3%.
Precedence Research
About 40% of IXN’s portfolio belong to software stocks. These stocks will also benefit greatly from the megatrends we have noted. In the artificial intelligence field alone, Gartner forecasts the artificial intelligence software market will grow from $124 billion in 2022 to $297 billion in 2027. This is equivalent to a compound annual growth rate of 19.1%.
IXN’s portfolio will benefit from a dovish Fed
About 19% of IXN’s total portfolio belong to non-U.S. technology stocks. These stocks will benefit from a dovish Federal Reserve. As we have observed in the past year, inflationary pressure has eased considerably. Therefore, the Federal Reserve may soon have the room to lower its rate. This will result in a weakening U.S. dollar. Below is a chart that shows the relationship between IXN’s fund price and the strength of the U.S. dollar. As can be seen, there is an inverse correlation between IXN’s fund price and the strength of the U.S. dollar. A strong U.S. dollar will typically result in IXN’ weak fund price and vice versa. As the Federal Reserve is now on the cusp of reversing its hawkish monetary policy to a dovish policy, we see more rooms for IXN’s fund price to go higher in 2024.
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Downside risk to consider
IXN has the potential to fall sharply during major corrections. As can be seen from the chart below, it has fallen about 50% after the burst of the Internet dot com bubble in 2000/2001. During the Great Recession in 2008/2009, it has also fallen over 50%. Therefore, short-term investors need to be aware of this risk. We suggest investors of IXN to own this stock for the long run as the fund will benefit from many important technological megatrends. The fund also has a good track record of performance. In fact, it has delivered a total return of 856.9% since its inception in 2001. Therefore, investors should treat any major corrections as good investment opportunities.
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Investor Takeaway
We think IXN is a good fund to own for the long run as it will benefit from many important technological megatrends. The fund has the potential to trend higher in the long run. Therefore, investors should have a long-term investment horizon, and treat any pullbacks as good buying opportunities.
Additional Disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.
