Summary
- IGM is named well: it contains tech exposures, just more of them, with more weighting towards smaller names.
- The IVW goes less deep, and is more exposed to tech big cap stocks which have more enterprise focused businesses.
- Deeper in the barrel are more consumer facing stocks that have been hurt in the current environment. However, expectations are similar based on multiples.
- We think there is more room to fall in big tech versus small tech, but both are negatively exposed to market forces.
The iShares Expanded Tech Sector ETF ( IGM ) is no liar. It has more elements than the iShares S&P 500 Growth ETF ( IVW ) and is more focused on mid-cap tech: expanded . Mid-cap tech is where more consumer facing tech stocks lie. Those are more exposed to the risk factors that we perceive in the current economic environment, and have seen fundamental pain already. However, if we are to take tech exposures, we'd prefer the deeper instrument because the reckoning is more in the rear-view mirror despite a similar multiple. But neither is particularly opportune in the current environment.
Breakdown of IGM
IGM has 330 holdings versus 246 of the IVW . The exposures are quite similar in terms of order. Apple ( AAPL ) is at the top, followed by the other tech mega-caps that trade on US exchanges. The thing we notice however is the difference in weightings. Being expanded, the IGM is weighted further towards smaller capitalizations within the tech space, digging deeper into the US tech barrel.
IGM Market Cap Histogram (iShares.com) IVW Market Cap Histogram (iShares.com)
There is more density over smaller cap stocks in the IGM.
From a PE perspective, both trade almost identically at 24x, which is more or less in line with S&P multiples, reflecting that both do ultimately represent the most index-moving industries in the US. While there is no value angle, we think that the IVW deserves lessened expectations as larger tech companies with more enterprise focused businesses have yet to feel the smart of the current economic conditions as much as smaller consumer facing tech businesses. Expectations should not be the same.
Remarks
The issue that we've been focusing on in this cycle as it pertains to the economy is to do with the bifurcations between corporate and consumer spending. So far corporate spending has been more resilient. We think that there could be a reckoning as corporate profits and investment ultimately depend on consumer demand, where consumer confidence has taken a major hit and will likely continue to be impaired for a while. Expectations for the IGM where stocks have already taken a bigger hit, indeed a 27% vs a 20% YTD decline for the IVW, should be a little more rosy since there's less room to fall. While some elements of the economics of being an enterprise focused business should fundamentally favor the larger allocations in the IVW, in a recession everything is going to be hurt. To some extent, the necessity and backend services, that are required cost-centers no matter what, may be more resilient, which is likely how the market views the deltas between these ETFs. This does benefit IVW, but still we think confidence in those stocks have yet to see impacted fundamentals and a shaking in confidence, where they are looked upon as unstoppable.
However, neither is particularly attractive. These stocks pack some Beta and the market is growing out of a TINA conditioning. Other asset classes are becoming more interesting. Indeed, a lot of money has flown into bond ETFs . So we're watching out with these equity market stalwarts.
For further details see:
IGM Goes Deeper Into The Tech Bucket Where Consumer Risks Are Higher