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home / news releases / IXN - IXN: Gain Exposure To Tech Giants Currently Leading The Artificial Intelligence Rally


IXN - IXN: Gain Exposure To Tech Giants Currently Leading The Artificial Intelligence Rally

Summary

  • IXN is a highly concentrated ETF that invests in technology stocks in the U.S., East Asia, and Europe.
  • Top holdings Microsoft and Apple currently comprise 37% of total portfolio, making this ETF very growth-oriented.
  • Recent developments and forecasts for the artificial intelligence industry could help create long-term price appreciation for this ETF.

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I rate the iShares Global Tech ETF ( IXN ) a long-term buy, as it could profit from potential catalysts in the technology sector. In particular, the public is quickly recognizing the everyday usefulness of artificial intelligence ((AI)), prompting its continuous expansion. This also provides tech companies with opportunities to either create their own AI or heavily invest in an existing system.

A recent report by the McKinsey Global Institute projects that the AI industry is expected to deliver additional global economic activity of around $13T by 2030. The AI industry was valued at nearly $120 billion in 2022, and is projected to compound its growth at a rate of 38% from 2023 to 2030. I believe these metrics could predict significant profits for investors, especially as AI becomes more integral in the fields of industrials and healthcare. The McKinsey report also predicts that nearly 70% of companies will have adopted at least one form of AI technology by 2030.

Tech giants like Microsoft ( MSFT ) and Apple ( AAPL ) are now making AI a primary focus of their operations. Prioritizing AI in its early stages is an advantage easily taken by such large, established businesses. As a result, Microsoft got an early head start in the recent stock price rally surrounding AI. Apple CEO Tim Cook also disclosed that he sees "enormous potential" in AI, and plans to make it a more central aspect of Apple's business strategy. These recent developments give IXN an advantage as it allocates 37% to Microsoft and Apple alone.

I believe that AI prices will likely experience many oscillations as society balances its excitement and concerns over this revolutionary system. Ultimately, the emergence of AI could have a meaningful impact on the asset makeup of IXN, lifting its price much higher over the next several years - thus, my long-term buy rating.

Strategy

IXN tracks the S&P Global 1200 Information Technology Sector Index. This ETF exposes investors to the global technology industry and includes companies involved in the development of software, hardware, and semiconductors. International holdings provide geographical diversification and potential benefits associated with further long-term growth potential in the technology sector. IXN is managed and designed by BlackRock's iShares unit, the largest ETF provider in the world.

Holdings Analysis

Non-U.S. nations present in the holdings of IXN include Taiwan, Japan, South Korea, Germany, and the Netherlands. The most prominent holdings in IXN are Apple, Microsoft, and NVIDIA (NVDA). All but 7% of IXN's holdings fall within the technology sector, as Standard & Poor's defines it. Three stocks in the portfolio fall outside of tech, but these companies are either major credit card processors or payroll processing business, thus fitting the "tech" label by extension.

In addition to the major focus on the two tech giants mentioned earlier, IXN's next eight holdings make up about 22% of the fund, bringing the weighting for the top 10 holdings to 59% of the entire ETF. The highly concentrated composition of this ETF might be favorable to more tactical, risk-tolerant investors. The top 25 holdings compose 75% of total holdings, so the remaining 120 assets represent a mere average 0.2% each. These bottom holdings therefore have minimal impact toward the performance of IXN.

Strengths

The technology sector has historically been very profitable, scalable and future-oriented, making it attractive to many investors. In addition to AI, many holdings in IXN are also at the forefront of developments in cloud computing, virtual reality, and blockchain. IXN is highly liquid and has a 30-day average daily trading volume of 320,000 shares. This makes it easier for investors to trade shares without enduring serious price fluctuations. IXN also has a low expense ratio of just 0.40%, meaning investors can focus more on growth and less on excessive fees.

Weaknesses

IXN is marketed as a global ETF. However, the larger majority of holdings are headquartered in the U.S., with much less representation in Europe and East Asia. Therefore, investors should be aware that despite being marketed as a global ETF, its international prevalence is minimal. Additionally, with the top 10 holdings in IXN representing nearly 60% of the portfolio compared to the median of about 35% among all ETFs, there is much more single-stock risk here than in most funds investors will consider. That top-heaviness could end up being a strength or weakness, depending on market conditions and investor attitudes toward big tech stocks. That said, investors should not view IXN's 149 holdings as providing immense diversity to their portfolios.

IXN's strong focus on technology also makes it somewhat volatile, with a standard deviation of 32 vs. a median of 24 (all ETFs), and a five-year beta of 1.15. So, unless an investor is willing to be extremely patient and endure long periods of weak performance in bear market cycles, IXN's volatility detracts from its usefulness for some investors.

Opportunities

The main opportunity for IXN over the intermediate to long-term is the potential to capitalize on the intense competition surrounding AI from large-cap tech companies like Microsoft and Apple. Microsoft in particular is currently leading against Google in the " AI war " over who can produce the most efficient AI. Currently, Microsoft's recent investment into OpenAI's ChatGPT puts it ahead. Microsoft's dominance going into the AI wave could be a huge opportunity for owners of IXN to profit.

Threats

Although IXN has positive momentum and strong metrics, it is by no means immune to negative macro events. As interest rates remain elevated and the Fed remains hawkish , even a small recession in 2023 could hurt the profits of companies in IXN. Furthermore, well-publicized geopolitical tensions between China and Taiwan could negatively impact the profits of companies like Taiwan Semiconductor (TSM). Generative AI systems like ChatGPT have a lot of uncertainty because they're so new and innovative. Generative AI is a system that utilizes complex learning algorithms and neural networks to generate original media similar to humans. For example, ChatGPT has shown competency in maintaining conversations and assisting with school assignments.

However, generative AI has also raised ethical concerns. For example, its propensity to resemble human thinking means it could easily perpetuate existing biases and inequalities present among humans. Therefore, AI's social image remains somewhat fragile and the hype could fade just as quickly as it started. In that manner, it resembles some aspects of social media technology, where the profit cycle for some applications went from new and unique to mature and played out in a relatively short time frame.

Conclusions

ETF Quality Opinion

IXN is particularly attractive to me due to my long-term bullish view on the technology sector. The role of top holdings like Microsoft and Apple in the expansion of AI make this ETF potentially profitable over the next several years. It will likely be a bumpy ride, but ultimately a profitable one for investors.

ETF Investment Opinion

I rate IXN a buy, with a three- to five-year time frame in mind. Part of this momentum comes from the reemergence of big tech stocks after a bearish 2022. The current rebound is still in the early stages and might represent a good entry point in IXN for long-term investors. Moreover, IXN could profit from easing interest rates and the proliferation of new tech innovations, like generative AI from large-cap companies like Microsoft and Apple.

For further details see:

IXN: Gain Exposure To Tech Giants Currently Leading The Artificial Intelligence Rally
Stock Information

Company Name: iShares Global Tech
Stock Symbol: IXN
Market: NYSE

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