IGM - IGM: A FAANG-Filled Equity ETF For Those Still Bullish On The U.S. Tech Industry

Summary

• IGM gives FAANG investors a lot to like. Many of the most popular big-name tech, communications, and consumer stocks live there.
• IGM is managed by Blackrock's iShares unit, which handles some of the largest technology ETFs.
• IGM has outperformed the S&P 500 by 175% over the last 10 years.
• However, I'm rating it a hold.

Currently, I rate iShares Expanded Tech Sector ETF ( IGM ) a hold. Like the Nasdaq 100-Index ( NDX ) this ETF resembles, IGM is a top-heavy ETF, with 25% invested in only three companies. I was very confident in IGM's continued potential, but the massive tech sector layoffs have made me think twice about its returns in the near future.

Strategy

IGM tracks the performance of the Dow Jones U.S. Technology Index. This index aims to provide exposure to a basket of tech companies involved in areas such as developing, producing, and/or distributing technology-related products and services. While the index name includes the word "technology," from an S&P sector classification standpoint, the index offers exposure to communications and consumer stocks as well.

Holdings Analysis

IGM contains many of the so-called FAANG stocks, which originally included Facebook, now called Meta Platforms (META), at 3%. The others are Amazon (AMZN) at 8%, Apple (AAPL) at 8%, Netflix (NFLX) at 2%, and two share classes of Alphabet (GOOG)(GOOGL) that combine for 8%. Over time, the FAANG group has been interpreted differently by different investors, but often includes a pair of other IGM top holdings - Microsoft (MSFT) at 8% and Nvidia (NVDA) at 5%. So, like the Nasdaq-100 Index and its associated Invesco QQQ ETF ( QQQ ), this ETF is top-heavy. Just three companies make up 25% of its assets and the top 10 are spread across only 10 popular stocks, which make up 50% of its assets, as shown in the table below.

IGM has 329 holdings, so, for the most part, the majority of stocks in this fund is essentially "window dressing" - meaning that the companies other than the top 10 are, in a sense, just there for show. Thus, IGM is a FAANG/big tech-driven ETF.

Strengths

IGM has produced a return approximately 140% above that of the S&P 500 over the past 10 years. However, as the chart below shows, the gap has narrowed significantly following a decline of more than 30% in both the Nasdaq and IGM in 2022.

IGM's annualized standard deviation of monthly returns is around 28%, which means the fund is very volatile. The max drawdown of 41% suggests this is a fund for high-risk/high-reward individuals. Furthermore, with 16% forecast revenue growth and 11% forecast five-year earnings growth for the current underlying portfolio, there is clearly potential upside for this ETF beyond its impressive past.

The chart above is my technical view on IGM. Viewing this in a four-hour time frame, the 50-day exponential moving average ((EMA)) has crossed upward through the 200-day EMA. This suggests a strong possibility of an upturn in IGM's price. On Jan. 23, 2023, IGM broke a long-term downtrend pattern and a channel pattern trend on Feb. 1. I expect a bull run for IGM in the near future.

Weaknesses

IGM's expense ratio is 0.40%, twice that of the similarly structured QQQ. In addition, its beta has been 1.16 over the past five years. That might be understated, as FAANG-like stocks spent nearly a decade outperforming the S&P 500 in up and down markets. More recently, the previous tendency for IGM to outperform the broader market in up cycles and underperform in down cycles has returned.

IGM has a moderate dividend yield of 0.44% when compared to its peers. However, it's still on the lower end when compared to other non-tech ETFs.

In 2022, IGM lost 35% - a beta for the calendar year of more than 1.7 compared to the S&P 500. The bottom line here is that IGM might no longer offer the best of both worlds (strong relative performance in bull and bear markets). This could be a major adjustment for FAANG-loving investors.

Opportunities

The recent layoffs in top tech companies look favorable purely from a financial perspective, as they will have reduced those companies' expenses and increased operational efficiencies. This will improve these firms' balance sheets, and might position tech companies more favorably than other sectors.

Continued advancements in areas such as artificial intelligence, cloud computing, and the Internet of things (IoT) are bound to continue. These are secular trends, not one-year wonders. In recent times, we've seen the AI tool ChatGPT set the record for the fastest-growing user base, reaching 100 million users in just two months. As technology continues to play a vital role in the global economy, IGM can be a very efficient link to that growth potential for investors.

Tech has been one of the sectors with the most growth in the past decade, and forecast revenue growth of 16.19% suggests that the show is not yet over. IGM provides broad exposure to the entire technology sector, including some niche areas such as blockchain and artificial intelligence. The market for augmented reality ((AR)) and virtual reality ((VR)), which Meta is currently focused on, is expected to grow to $31.1 billion in 2023.

Threats

According to a report by Spiceworks , 173 tech companies have offloaded 56,570 employees so far in 2023. Those layoffs are primarily a cost-cutting measure to prepare these companies for a worsening economy going forward. It remains to be seen whether the recent spike in headcount reduction in many top IGM stock holdings will help or hurt the stock prices of those tech giants. Regardless of the ultimate outcome on the stock market scoreboard, this is a clear threat to the continued dominance of this type of stock.

Potential regulatory changes and increased government oversight are additional potential worries for companies held in IGM. As technology companies continue to grow in size and influence, there has been increasing scrutiny from governments and regulators around the world. This could include increased regulations on data privacy, antitrust laws, and taxes.

Conclusions

ETF Quality Opinion

IGM is a solid choice to play a specific, niche role. It is a one-stop shop for FAANG stocks, as much or more than QQQ is. The fund has clearly shown that it can produce eye-popping performance in strong, tech-led markets.

ETF Investment Opinion

However, this is not likely to be a strong, tech-led market - other than the fairly brief price "pops" we've seen during the current bear market. Tech companies are already gearing up for a slowdown in the economy, as evidenced by the layoff trend I described above.

I used to be very confident in IGM's continued potential, but the massive layoffs have made me think twice about its returns in the near future. I'm not ready to apply a negative rating yet, since I believe the current market rally has some runway left. Thus, my bottom line rating, for now, is hold.

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