Technology is the biggest thematic in the investment world, and naturally, everyone wants to invest in it. Fortunately, it has never been easier, with a burgeoning array of exchange-traded funds (ETFs) devoted to technology.

The beauty of these ETFs for an individual investor is that by buying one ASX-listed stock, investing any amount of money, you have exposure to some of the most innovative companies in the world, that are leaders in their respective fields, changing the way we live. It is so easy.

Even better, from the first broad tech ETFs that gave the investor access to the tech-laden Nasdaq index, a whole new sub-sector of tech ETFs has emerged, based on particular areas, built around specially created indices, to allow investors to hone their exposure in a very targeted fashion: ETFs available on the ASX offer investment in industries such as battery technology, electric vehicles, cyber-security, semi-conductors, artificial intelligence, robotics and automation, payments technology, and biotech. The ASX ETF world is a cornucopia of interesting exposures.

Of the broad indices, Betashares’ Nasdaq 100 ETF is a great example of a simple, easy-to-achieve tech exposure.

1. Betashares Nasdaq 100 ETF (NDQ, $44.34)

Market capitalisation: $4.5 billion

12-month total return: 32.4%

Three-year total return: 14.8% a year

FY23 dividend yield: 2.1%

Management fee: 0.48%

NDQ aims to track the performance of the Nasdaq 100 Index (before fees and expenses). The Nasdaq 100 comprises 100 of the largest non-financial companies listed on the Nasdaq stock market and includes many companies that are at the forefront of the new economy. Like the other tech ETFs, NDQ provides diversified exposure to a high-growth potential sector that is under-represented in the Australian share market.

Currently, NDQ’s Top 10 holdings are:

1. Apple. 8.8%
2. Microsoft  8.5%
3. Nvidia  7.9%
4. Broadcom  5.2%
5. Amazon.com  5.1%
6. Meta Platforms  4.5%
7. Tesla  2.9%
8. Alphabet  2.8%
9. Alphabet  2.7%
10. Costco. 2.5%

Global X’s FANG+ ETF is a good example of the next step in a more targeted investment: it is based on a special index, the New York Stock Exchange (NYSE) FANG+ Index, introduced in 2017 to capture the group of tech leaders embodied in the FANG acronym: Facebook (now Meta Platforms), Apple, Netflix, Google (now Alphabet). The ‘FANG+’ term recognised that there were other major tech leaders either emerging, or that should have been considered in the original acronym: the likes of Microsoft, Amazon.com, and of course, the emergence of chip superstar Nvidia.

2. Global X FANG+ ETF (FANG, $26.99)

Market capitalisation: $450 million

12-month total return: 51.3%

Three-year total return: 21.4% a year

FY23 dividend yield: n/a

Management fee: 0.35% a year

The index on which FANG is based comprises US-domiciled companies at the leading edge of next-generation technology, that includes household names and newcomers.

Currently, FANG’s Top 10 holdings are:

1. Tesla  12.5%
2. Snowflake  10.4%
3. Amazon.com  10.2%
4. Apple  10.1%
5. Alphabet  10.1%
6. Meta Platforms  9.8%
7. Microsoft. 9.7%
8. Netflix. 9.1%
9. Broadcom. 9.0%
10. Nvidia. 9.0%

There is also a currency-hedged version, with the ASX code FHNG, in which the foreign currency exposure is hedged back to the Australian dollar, for investors who prefer that. FHNG has a slightly different Top 10:

3. FHNG, $9.96

Market capitalisation: $326 million

12-month total return: 10.5%

Three-year total return: 4.2% a year

FY23 dividend yield: n/a

Management fee: 0.38%

1. Amazon.com  10.7%
2. Tesla  10.6%
3. Alphabet  10.5%
4. Snowflake  10.4%
5. Meta Platforms  10.3%
6. Microsoft Corp.  10.0%
7. Apple  9.9%
8. Netflix  9.9%
9. Nvidia  9.0%
10. Broadcom  8.7%

But again, the point is that the vehicle is a simple structure that gives a concentrated exposure to global technology and innovation leaders and can be used as a core building block for growth-oriented portfolios, achieved cheaply (a 0.38% management fee.)

4. Global X Morningstar Technology ETF (TECH, $95.77)

Market capitalisation: $326 million

12-month total return: 10.5%

Three-year total return: 4.2% a year

FY23 dividend yield: 7.35%

Management fee: 0.45%

Some investors will want to spread their tech investment more globally, and there are some excellent ETFs to do this: a really good example is the Global X Morningstar Global Technology ETF (TECH). This digs a bit deeper than the Nasdaq-heavy ETFs – although, at the moment, 72.3% of the portfolio is US-domiciled companies, which of course, have global markets.

Australia is the next-biggest domicile, with 6.7%, followed by the Netherlands and Germany, both on 4.2%. Software is the dominant industry weighting, at 36% of the portfolio, followed by semiconductors (25.6%), Internet (11.7%) and electronics (10.2%).

The index on which TECH is based – the Morningstar Developed Markets Technology Moat Focus Index – enables it to have an unconstrained approach to investing, spanning multiple segments, and able to include both household names and rising stars from around the world.

In terms of stocks, TECH’s Top 10 holdings are:

1. Teradyne US, automatic test equipment  5.7%
2. WiseTech Global Australia, logistics software  4.9%
3. Tyler Technologies US, public-sector software solutions  4.7%
4. Infineon Technologies Germany, semiconductors  4.2%
5. SS&C Technologies US, financial services and healthcare technology  4.2%
6. Lyft Inc. US, ride-sharing  4.1%
7. Fortive Corp. US, connected workflow technology  3.9%
8. ON Semiconductor Corp. US, semiconductors  3.9%
9. Murata Manufacturing Co. Japan, electric components  4.0%
10. Fortinet US, cybersecurity  3.9%

High Growth Potential Every day, 2.5 quintillion bytes of data & 2.5 billion strands of information are created by our online activities, from cloud-based gaming to e-commerce and beyond. Structural Tailwinds The realm of internet-enabled devices continues to expand to new categories, allowing manufacturers to monitor and service products via software upgrades.

Another tech ETF that I also think deserves attention is Betashares’ Asia Technology Tigers ETF. It follows an index called the Solactive Asia Ex-Japan Technology & Internet Tigers Index, so it’s an example of the newer kind of ETFs, that were not built around an existing index, but an index provider (in this case, Solactive) worked with the ETF issuer to tailor the exposure that the latter wanted to offer investors. The index comprises the 50 largest technology and online retail stocks in Asia (excluding Japan); the ETF then aims to track the performance (before fees and expenses) of the index.

5. Betashares Asia Technology Tigers ETF (ASIA, $9.37)

Market capitalisation: $559 million

12-month total return: 28.3%

Three-year total return: –4.2% a year

FY23 dividend yield: 0.83%

Management fee: 0.67%

The ETF gives investors exposure to the technology ‘tigers’ that are leading Asia’s technological revolution. Due to its younger, tech-savvy population, Asia is surpassing the West in terms of technological adoption and the sector is expected to remain a growth area. In one transaction, ASIA offers exposure to a diversified portfolio of companies from a high-growth sector that is under-represented on the Australian share market and complements a portfolio with significant US technology exposure.

ASIA’s Top 10 holdings are:

1. Tencent China, internet and technology company  11.4%
2. Alibaba Group China, e-commerce, retail, Internet, and technology  10.6%
3. Taiwan Semiconductor Taiwan, semiconductor manufacturing  10.5%
4. Samsung ElectronicsSouth Korea, IT, consumer electronics and semiconductors  8%
5. SK Hynix Inc. South Korea, semiconductors  5.6%
6. Infosys India, information technology  5.2%
7. Hon Hai Precision Industry Taiwan, electronics contract manufacturer   4.8%
8. NetEase Inc. China, internet technology.  4.3%
9. MediaTek Inc. Taiwan, semiconductors. 4.3%
10. JD.com Inc. China, e-commerce. 3.1%

The last technology investment vehicle I want to look at is quite different to the ETFs – but is a very interesting stock.

 

6. Bailador Technology Investments (BTI, $1.185)

Market capitalisation: $174 million

12-month total return: 1.7%

Three-year total return: 2.8% a year

Bailador Technology Investments is a listed investment company (LIC) that is a specialist “expansion-stage” technology venture capital fund, investing in privately owned technology businesses that have an exciting growth runway ahead of them. The fund gives retail investors exposure to venture capital investing, an area that is typically difficult for all but institutional funds or high-net-worth individuals to access. As a listed stock, there is no minimum investment amount – as is also the case with the ETFs – investors can buy any amount of Bailador shares (subject to market liquidity, that is), and get access to high-growth start-ups, investing alongside larger institutional funds with only small amounts of capital.

Bailador is a “permanent capital” fund that provide investors with access to a fund that does not have a fixed end-date, as the proceeds from the sale of assets can be recycled back into new investments. In this, it follows a similar philosophy to that of Warren Buffett’s and Charlie Munger’s listed investment vehicle Berkshire Hathaway, which has a permanent capital base that gives it an almost infinite time horizon on investments. Investors in Berkshire Hathaway have liquidity at any time through buying and selling the stock on market.

The management fee for BTI is 1.75%, calculated on pre-tax net tangible assets (NTA) value. There is also a performance fee of 17.5% of the increase in the net asset value of the company, subject to the net asset value of the company increasing by 8% a year compound.

Bailador mainly invests in relatively small, unlisted tech companies that need expansion capital to grow. The target businesses are typically software, internet, mobile, data or e-commerce businesses that have an enterprise valuation (equity plus debt) of between $10 million and $200 million. They will have proven that they can generate repeatable revenue; have capable management; demonstrated business models and opportunities to expand.

Also, Bailador needs to see strong operating margins, demonstrate operating leverage (that is, become more profitable as they grow), fulfil a clear unmet need for customers, and have an enduring competitive moat. Even if a potential investee company has all of these attributes, Bailador won’t invest unless it sees a valuation multiple (as a proxy for actual valuation) that it considers appropriate. The company sets itself the task of delivering a minimum 25% internal rate of return (IRR) on a new investment.

Bailador doesn’t only invest in its portfolio companies: it provides advice and support for its companies in areas such as capital raisings, sales processes and initial public offerings (IPOs); but also help with the ongoing tasks that a growing business needs to do, like hiring new senior executives, opening international offices, prioritising product development, adjusting cost bases, and so on. Each portfolio company has at least two Bailador team members who understand the detail of that business and are engaged with the company’s work plan. The aim is to support its portfolio companies over a long period; Bailador runs a concentrated portfolio of 8 to 12 investee companies so that its people are not spread too thinly and can form very deep relationships with the investee companies.

A great example of this process is Bailador’s investment in ASX-listed global hotel commerce platform SiteMinder: it first invested in SiteMinder in 2012, tipping-in $5 million. SiteMinder listed in November 2021, and now has a market capitalisation of $1.3 billion, and Bailador’s holding of 6.1% of the shares is worth $81.8 million, and BTI has realised more than $30 million of cash from the investment. Another example is AI-powered global translations company Straker (STG): Bailador originally invested in 2015, held its investment in the October 2018 IPO and continued to support the business by investing post-IPO. Bailador remains Straker’s second-largest shareholder, with 14.2% of the shares.

In the recently completed FY24, the after-tax BTI portfolio return was 8.5%, the result of a gain in the post-tax portfolio (investment gains minus expenses, after all fees) of 6 cents a share and the addition of the payment of 6.7 cents per share of dividends.

The company said its private-company investments performed well during the year as businesses but did not contribute materially to growth in the value of the fund. Where in FY23 BTI’s private company investments delivered an IRR of 36.3%, in FY24 the comparable IRR was 2.3%. Bailador says the private company portfolio is “in very good shape,” and it expects strong growth in FY25.

BTI’s NTA per share (pre-tax) at close of June 2024 was $1.72, and $1.58 post-tax, meaning the stock trades at a significant discount to NTA.

Bailador is a fully franked dividend payer, with a policy of paying a dividend yield of 4% of its pre-tax NTA, or 5.7% grossed-up. In FY23 it paid 10.9 cents a share, giving an historical yield of 9.2%, or 13.1% grossed-up; but the returns are lumpy, and that level of payout cannot be expected every year. At the close-of-financial-year share price, BTI’s annualised 4% dividend based on the June pre-tax NTA represented a dividend yield of 5.8%, or 7.7% when grossed up for franking credits; the company will “formalise” and pay its final FY24 dividend of 2% of June pre-tax NTA, following release of its full-year result. Think of the BTI dividend policy as complementing the portfolio’s NTA gains, with a regular return.

The total-return picture for BTI does not look like it is setting the world on fire – but I think this stock is well-poised to ride the skill and patience of its investment team.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.