One of my smartest investment plays of recent times has been HNDQ — the BetaShares NASDAQ 100-Currency Hedged ETF. As it captures the top 100 Nasdaq companies, of which the Magnificent Seven (M7) have a big influence on, the returns have been great. However, with the rotation out of tech into other companies now on, the question is should I/we dump HNDQ and position ourselves with the companies that will benefit from money coming out the M7 group and going into stocks that have been unloved since US interest rates rose 11 times since March 2022?
The M7 group are Apple, Microsoft, NVIDIA, Alphabet (i.e. Google), Amazon, Meta, and Tesla.
HNDQ
By way of comparison, let’s look at the performance of HNDQ and the Nasdaq Composite (IXIC).
The chart above shows since January 2023, HNDQ is up around 73%, while the broader Nasdaq Composite was up about 67%.
Last week, as the rotation stepped up a gear, as economic data in the US points more firmly to the first rate cut in September, the IXIC was down 4.11% over the five days, while HNDQ lost 2.81%.
These are early days in the rotation, but I have always calculated that if the M7 stocks were the main drivers of the Nasdaq’s and HNDQ’s rises, then eventually as rates fell, tech and other growth stocks would keep HNDQ rising. Also, lower US rates would lower the greenback against the Australian dollar and that should be a plus for those who got into HNDQ, when the Aussie dollar was lower.
So, the next question is this: should we pocket our HNDQ profit and gamble that the reduced exposures to M7 stocks by investors will have a bigger negative effect on HNDQ against the positive effects of the other 93 stock in this Nasdaq 100 ETF, which could be set to rise?
Writing for Zacks Investment Research, Kevin Matras had some timely observations about the rotation and its impact on the stock prices of non-M7 companies.
“Until recently, large-cap tech/AI dominated stocks (the largest ones often referred to as the Magnificent 7) have been the key driver of the rally,” he pointed out. “And it sent the market-weighted S&P 500 and tech-heavy Nasdaq soaring. In fact, in the first half of the year, the S&P was up 14.5%, with the Nasdaq up 18.1%, all while the neglected small-cap Russell 2000 only added 1.02%. Mid-caps also lagged, gaining just 5.34%. And even the Dow trailed with only 3.79%.”
He also noted the following:
1. For the first six months of the year, the M7 made up 59.5% (just under 60%) of the S&P’s gains.
2. The full market-weighted S&P was up 14.5% in the first half.
3. If you take out the M7, the S&P would’ve only been up 5.86%. Like me, Matras expects a catch up for those stocks that are interest-rate sensitive or aren’t AI darlings.
4. Since the rotation, the small caps have been popular. In fact, for the past month, the Russell 2000 small cap index is up 8.03%, showing that the next phase of the market will favour many small- and mid-cap stocks.
Matras and I agree on the future of the big cap tech stocks. “I don’t see this market rotation, however, as a wholesale dumping of large-caps or the AI trade,” he argued. “I do see a lessening of the over-concentration in those names. Especially after the monster-gains they’ve seen, but that trade has worked so well for a reason — and it’s because the AI boom is real, and is supported by real earnings, and real growth potential. And AI is shaping up to be just as transformative, if not more so than the personal computer, the internet, and the mobile phone. And it’s expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives.”
The rotation will give breadth to the next leg up for this rally. But the question is: how many companies in the Nasdaq 100 list haven’t had a great year? That could help us work out whether HNDQ has more upside. (This might look like a boring read but it shows I’ve actually looked at all 100 stocks in the Nasdaq 100, which HNDQ is based on.)
On my count, 41 companies in the Nasdaq 100 list have either fallen or risen by less than double figures, while the Nasdaq 100 was up 26.5% and suggests that many of these companies could benefit from the rotation that’s going on right now.
On the outlook for stocks, apart from Donald Trump potentially causing a global trade war with his proposed 60% tariffs on China and 10% tariffs on everyone else, falling interest rates will be a tailwind for stocks.
“The 4-year Presidential Cycle shows that year 4 (that’s this year) is the second-best year of all four years; second only to year 3 (last year, when the S&P gained 24.2%), which is the best year of all 4 years,” Matras reminds us. “Once again, history shows that when the S&P was up by more than 8% in a single month (November 2023 was up by 8.91%), (this has happened 30 times since 1950), a year later the index was higher in 27 out of those 30 times (that’s 90% of the time), with an average return of 15.8%.”
He also points out that Price Earnings ratio for the S&P 500 index has been on the rise but is still at relatively low levels on an historical basis.
So, what are my conclusions?
- HNDQ is likely to suffer short term while the rotation happens.
- Eventually, the sell offs will be offset to a degree by those companies that will become increasingly popular as interest rates fall.
- HNDQ is likely to rise again over time, but I don’t think it will have the spectacular rise we saw when the M7 group rocketed higher over the past two years.
- I’m going to take profit and might wait for another time to get back in, maybe after the US election.
Generally, tech stocks will gain when rates are cut but it could take some time for the gains to be significant, given that the Fed’s September meeting is still seven weeks away and US election news will mix in with US reporting season that hots up this week.
What will I do with my money?
I’ll look at EX20 that will give me exposure to the 180 stocks under the top 20 in the S&P/ASX 200. I expect a rotation out of the banks and some of the top 20 stocks into mid-cap and small-cap companies.
I could top up my exposure to the US market via WQG/WCMQ or Vinva Global Systematic Equities Fund, both of which are funds that have been brought to market via Associate Global Partners, which I own significant shares in.
WQG has performed well and Vinva has returned 18.5% over the past three years.
IHVV (which tracks the S&P 500) would do okay as well, even though the M7 group has powered this index up 21.35% in a year, being responsible for half of that gain. That said, I think the rotation out of the M7 will undoubtedly favour many of the other 493 stocks in the index and so IHVV, with the hedging for an expected rising dollar still makes investing sense.
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