President and CEO of Evolve ETFs explains how new TECH ETF solves operational hurdles faced by Canadian advisors
An often-cited advantage of investing in ETFs is how they provide easy diversification: under one ticker, you can get exposure to a basket of stocks that can be as large as the S&P 500. But that’s not what investors can expect from Evolve ETFs’ latest offering.
A uniquely Canadian solution, the Evolve FANGMA Index ETF has just been launched on the TSX. With the ticker TECH, it offers investors equal-weighted exposure to the equity securities of the Big Six of technology: Facebook, Amazon, Netflix, Google’s parent company Alphabet, Microsoft, and Apple.
“These companies have emerged as giants within their respective areas of expertise, but the truth is they have multiple divisions within their organization,” said Raj Lala, President and CEO of Evolve ETFs. “They have so many business lines involved in innovation that they’ve almost become a one-stop-shop for exposure to all the transformations that we’re going through.”
There’s no questioning the gravitational pull that FANGMA stocks have on the U.S. equity markets. They make up 22% of the S&P 500 and 46% of the Nasdaq 100 in terms of total capitalization, and they accounted for more than half of the S&P 500’s return over the last year. And while the S&P 500 has gone up around 250% since 2012, a hypothetical S&P 494 – one that doesn’t include the FANGMA companies – would have gone up just 150% over the same period.
Because of the FANGMA companies’ diversified business operations, Lala argues that TECH could almost be considered as an ETF within an ETF. Of course, the practical reality is that it’s a portfolio of six names – highly concentrated, by most standards – which may lead most index ETF investors to ask “why?” or even, “why bother?”.
To answer those questions requires understanding the “how” of investment, particularly as it applies to advisors.
“This idea actually came from a large advisor team that we had been talking to,” Lala said. “Evolve has made its name with products that have a strong thematic investment thesis. But now, this is the first time we’ve created a product that’s more focused around the operational challenges that advisors have, not just the investment case.”
The first operational hurdle addressed by TECH involves cost. Currently, getting just one share each of the FANGMA companies would cost a client around $7,000 in total. With the TECH ETF, even investors with modest account sizes can get a piece of the action for just $10.
“It’s a very elegant TFSA solution,” Lala said. “Right now, if someone wanted to buy each of the FANGMA stocks individually, they couldn’t do it without burning through their whole TFSA contribution room for the year.”
From an advisor practice perspective, the ability to effectively get smaller slices of FANGMA stock exposure has profound implications. Because they’re no longer dealing with thousands of dollars concentrated in just a few holdings, they’re vastly less likely to run up against concentration limits, trading limits, and other thresholds that would raise portfolio management flags.
“Let’s say an investor had two shares of Amazon and one share of Netflix, and they wanted to sell their Netflix stake to get more of Amazon,” Lala said. “That wouldn’t be possible because Amazon share prices are much higher; they’d have to invest a lot more. TECH takes away that trouble with portfolio rebalancing, and its holdings are rebalanced every quarter.”
Evolve’s FANGMA ETF is index-based, equal-weighted and also creates choice for Canadian investors and advisors with the availability of multiple currency options. Offered under three share classes, it provides the ability to buy shares denominated in Canadian dollars, either hedged (TECH) or unhedged (TECH.B), as well as U.S. dollars (TECH.U).
Finally, the fact that TECH is TSX-listed mitigates the pain of purchasing securities from outside of Canada. As Lala explained, owning foreign securities exposes investors to estate tax issues; because they’re considered foreign property, Canadians or their advisors need to complete a T1135 form every year when they own foreign securities in their portfolios. Holding those stock positions in a Canada-listed shell strips away that liability, which is very important to many advisors and investors today.
“This is actually the first of its kind in the world,” Lala said. “I think that’s because perhaps operationally, the RIAs in the U.S. don’t have major issues in buying FANGMA stocks. But I wouldn’t be surprised if somebody in another part of the world replicated this.”
