IXN - IXN: Upside In Microsoft And Apple Drive This Fund's Growth

2023-06-15 22:37:38 ET

Summary

• iShares Global Tech ETF focuses primarily on Big Tech, with Apple and Microsoft constituting 42% of the entire fund's portfolio, and has shown strong performance throughout 2023.
• The fund's heavy focus on semiconductors could benefit from incorporating more Asian semiconductor companies, particularly from South Korea, Japan, and China, to capitalize on the thriving industry in these countries.
• Microsoft's investment in AI, specifically in OpenAI's ChatGPT, positions the company at the forefront of AI innovation and provides a significant competitive advantage in the tech industry.

Strategy

Launched in 2001 by BlackRock, Inc. and managed by BlackRock Fund Advisors, the iShares Global Tech ETF ( IXN ) invests in stocks of companies within the information technology industry. The fund invests in both growth and value stocks of large-cap companies across a variety of sectors, including electronics, computer software and hardware, and semiconductors, in addition to information technology. IXN aims to track the performance of the S&P Global 1200 Information Technology Index by using a representative sampling technique. The index is rebalanced quarterly, and its holdings are market-cap weighted.

Holding Analysis

Using a market-cap weighting approach, IXN invests in a total of 140 technology stocks worldwide. Over 64% of the entire fund's portfolio is made up of IXN's top 10 holdings. Apple ( AAPL ) and Microsoft ( MSFT ) dominate the portfolio, each holding 22% and 20%, respectively. Nvidia ( NVDA ), the third most-weighted holding, accounts for 6% of the portfolio, while all other holdings constitute less than 3%. This domination by two stocks underscores the fund's primary focus on Big Tech. Although nearly 82% of the fund's focus is on companies within the United States, approximately 20% is allocated to companies in Taiwan, Japan, South Korea, the Netherlands, Germany, France, Canada, Sweden, and Finland.

Strengths

As previously mentioned, IXN has a strong focus on two tech giants: Apple and Microsoft. The fund continues to shift more weight towards these two companies, as well as Nvidia. This tactic effectively capitalizes on the growth of Big Tech companies.

Over the past year, all three companies have reported strong growth: Apple, Microsoft, and Nvidia are up 34%, 36%, and 160%, respectively. This indicates that the fund is well-managed and able to effectively respond to market trends. The fund managers are not merely following an index; they are actively adjusting weightings to favor companies that demonstrate strong growth. These companies gained substantial traction at the onset of 2023 and have exhibited an impressive recovery from the Big Tech slump caused by uncertain economic conditions. Now, tech stocks are no longer falling, and companies like Apple and Microsoft are leading a resurgence in the sector.

Just like its top three holdings, IXN has demonstrated strong performance throughout 2023. Currently, the fund is up nearly 40% from the beginning of the year, outperforming its closest peer competitors, CLOU and DAT. There is very little overlap in holdings between IXN and these funds (4% with CLOU and 0% with DAT), according to the ETF Research Center.

In addition to its strong 2023 performance, the fund also exhibits relative liquidity with a 3-month average daily share volume exceeding 206,000. This value is significantly higher than the mean of all ETFs (40,000), suggesting that IXN is actively traded. Thus, investors can buy or sell shares without significantly altering the price of the fund.

Weaknesses

In addition to IXN's heavy focus on Big Tech (namely Apple and Microsoft), the fund also places a large emphasis on semiconductors, at nearly 30%. Below is a visual of the fund's sector distribution. While IXN claims to invest in many Asian semiconductor companies, the only prominent Asian semiconductor company in the portfolio is Taiwan Semiconductor Manufacturing ( TSM ), which holds only a 3% weight. IXN would greatly benefit from incorporating more Asian semiconductor companies into its portfolio, particularly those from South Korea, Japan, and China. These three countries rank as the world's top semiconductor producers. China's recent ban on Micron Technology further demonstrates its thriving semiconductor industry's ability to produce semiconductors independently. The country can rapidly replace Micron's market share with rising domestic semiconductor companies. This increased competition from China could harm not only Micron but also the entire US semiconductor industry. As a result, I believe that IXN should shift more weight and invest more in Asian and Chinese semiconductor companies, which it is currently not doing.

Microsoft's Opportunities

I believe that Microsoft has the potential to be significantly transformed by the AI revolution. At the onset of 2023, Microsoft announced the third phase of its $10 billion investment in OpenAI's ChatGPT. By doing so, Microsoft is positioning itself at the forefront of AI innovation, providing the company with a significant competitive advantage in the tech industry. Bank of America ranks Microsoft as the number one AI company to invest in. Furthermore, Microsoft's offerings, such as GitHub Copilot and Office 365, represent significant advancements in AI innovation. The integration of AI into Microsoft's offerings is an encouraging sign of the company's future in the industry and can provide additional revenue streams.

Apple's Opportunities

Along with a positive outlook for Microsoft, I am also very bullish on Apple for the near term. The company has demonstrated consistent customer growth. With a customer retention rate of 90%, the majority of Apple customers remain loyal to the company. The company's retention rate has hovered around this figure for the past decade, and I don't anticipate this changing anytime soon. The company is also actively diversifying its revenue streams . The proportion of revenue from iPhone sales has been decreasing since 2015, and conversely, its services segment has been continuously increasing. Apple's services segment has massive growth potential as consumers are shifting towards valuing convenience over physical goods. Additionally, the services segment provides recurring revenue, unlike physical goods, which are more seasonal.

Conclusion

I rate IXN a Buy. The fund's growth is driven by the strong performance of tech giants like Microsoft and Apple. These two companies dominate IXN's portfolio, and I believe they have robust growth trajectories. Microsoft is poised to capitalize on the emerging AI industry through its investments in ChatGPT and its offerings in GitHub Copilot and Office 365. Despite these strengths, the fund's limited focus on the Asian semiconductor industry could potentially hamper IXN's growth. If IXN incorporated more Asian semiconductor companies within its portfolio, the fund could also benefit from stronger growth and innovation in this sector. Regardless, the fund has proven its ability to provide increasing and steady returns, which adds substantial credibility to it.

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