IXP - IXP: Google Is Looking Cheap

2023-09-01 05:52:35 ET

Summary

• IXP is heavily influenced by tech companies, particularly Google, which makes up around 30% of the fund.
• While there are other familiar tech names in IXP, such as Tencent and Meta, Google is probably the more attractive investment option.
• We'd consider buying Google directly instead of investing in the IXP ETF due to its high expense ratio and concentrated allocations.

The iShares Global Comm Services ETF ( IXP ) is dictated heavily by a lot of tech companies, but in particular there is a heavy skew towards Alphabet (Google ( GOOG )) at around 30%. The good news for IXP investors is that Google may be cheap, and IXP could gain on that. However, the other holdings in IXP are a little less interesting to us. We'd consider, especially given the skew already present, just buying Google instead. We've complained in the past about the skew in IXP and the fact that much like other ETFs focused on the US, the massive gravity around tech just means most ETFs including IXP are meaningfully tech exposed.

IXP Breakdown

Let's begin with a simple breakdown of IXP by its top holdings. Since there is a lot of skew in terms of the size of the allocations, it is pretty informative.

There are a lot of familiar tech names. Tencent ( OTCPK:TCEHY ), Meta ( META ) and also Google with exposure to both classes of shares. We don't love Tencent. Despite the quality of its holdings, we are always worried about China. Meta is also a mixed bag and a little concerning as it deals with real obsolescence risk which is becoming evident again in social media. While Meta is at least somewhere with some of its properties, we'd rather just stay away from binary issues involved in Meta.

Google is more of an attractive situation. The stock has repriced meaningfully this year. We believe this is a combination of continued growth despite headwinds in advertising, where now the economic environment might favour a resumption of more robust growth, as well as exposure to AI. Google is getting about as much credit as Microsoft ( MSFT ) although it has not made as large of a splash as of now in the AI space, but we think its chances are good in terms of monetising AI which is going to be a pretty large pie with a lot of different markets. There will be headline challenges, especially around the legalities, but ultimately the development of AI is not something that can be stopped, and there are major stakeholders, including Western governments, that are going to want customers on their side of the pond to come up with powerful AI first.

Some of the reason Google has repriced more that MSFT is also the greater exposure to advertising-related businesses, which are very discretionary and very cyclical, despite Google's dominant position in terms of providing real estate for ads and visibility. The fears have been assuaged repeatedly by evident resilience, but also finally what appears to be the end of rate hikes. Jobs data seems to be giving an important leading indicator about the inflation situation, and the info seems to be pointing to greater dovishness in the FOMC.

Bottom Line

IXP overall has a pretty high expense ratio at around 0.42%, despite quite lazily being exposed almost 30% to just Google. The PE comprehensively is around 20x, where Google's individual stock PE is around 24x. While diversification is nice, you can do it yourself in other markets than just tech, which IXP is quite focused on, and you can do it for much lower custody fees than 0.42%. Also, IXP has some exposures that are a little more mixed, even if they do come at slightly lower multiples than Google. Ultimately, we think that investors in IXP are probably better off going for the specific Google bet than paying for the management of the IXP ETF, and should start looking into the Google investment case which anyway drives the plurality of the IXP's performance.

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