ETF Insights: Emphasising strong fundamentals for long-term investment success (November 2024)

Check out this new ETF focused on earnings quality. Reduce concentration risk in the Magnificent 7 with this ETF. BlackRock unveils new AI ETF amid the AI boom. Discover the latest happenings in the ETF industry.

iFAST Research Team
iFAST Research Team13 Nov 2024 2056 Views
ETF Insights: Emphasising strong fundamentals for long-term investment success (November 2024)

Emphasising strong fundamentals for long-term investment success


Benjamin Graham famously said, “In the short run, the market is a voting machine but in the long run it is a weighing machine.” In the short term, stock prices are often influenced by investor sentiment, news, and speculation, and may diverge from a company’s intrinsic value. But over the longer run, stock prices tend to reflect the fundamentals of a company as characterised by its financial strength and earnings growth.  

For investors seeking sustainable returns, focusing on earnings quality is crucial. This is because reported earnings can sometimes be distorted by accounting practices, making a company’s financial health appear stronger or weaker than it really is. When identifying high quality companies, investors must evaluate whether profits are generated from core business operations or influenced by accounting adjustments.

First Trust launched the First Trust New Constructs Core Earnings Leaders ETF (NYSE: FTCE) on 3 October 2024 to provide investors with exposure to US companies with strong earnings quality. FTCE tracks the Bloomberg New Constructs Core Earnings Leaders Index, which comprises the top 100 companies in the Bloomberg 1000 Index with the highest earnings quality. Using a blend of technology and expert analyst review, companies are selected based on their “core” earnings, which accounts for non-recurring gains and losses, as well as “hidden” items found in footnotes of company reports and management discussions.

As of 7 November 2024, FTCE’s three largest sector allocations are Information Technology (31.36%), Financials (13.02%), and Health Care (10.97%). Its top holdings include NVIDIA (5.32%), Broadcom (4.61%), and Meta Platforms (4.43%). 

Figure 1: Sector Breakdown of FTCE

Table 1: Top 10 holdings of FTCE

Rank

Holding Name

Sector

Net Assets (%)

1

NVIDIA Corp

Information Technology

5.32

2

Broadcom Inc

Information Technology

4.61

3

Meta Platforms Inc

Communication Services

4.43

4

Ford Motor Co

Consumer Discretionary

3.97

5

Oracle Corp

Information Technology

3.57

6

Yum! Brands Inc

Consumer Discretionary

3.45

7

Eli Lilly & Co

Health Care

2.97

8

Accenture PLC

Information Technology

2.72

9

Adobe Inc

Information Technology

2.72

10

Verizon Communications Inc

Communication Services

2.70

Total

36.45

Source: Bloomberg Finance L.P., iFAST Compilations

Data as of 7 November 2024


FTCE comes with an expense ratio of 0.60% and some of its peers include the JPMorgan U.S. Quality Factor ETF (NYSE: JQUA) and the Fidelity Quality Factor ETF (NYSE: FQAL), which have lower expense ratios of 0.12% and 0.15% respectively. 

Table 2: Comparison against other peers 

Name of ETF

Expense Ratio (%)

AUM

(USD mil)

Average Daily Volume (‘000)

Inception Date

First Trust New Constructs Core Earnings Leaders ETF (NYSE: FTCE)

0.60

39.1

85.2

 3 Oct 2024

JPMorgan U.S. Quality Factor ETF (NYSE: JQUA)

0.12

5,095

456.3

9 Nov 2017

Fidelity Quality Factor ETF (NYSE: FQAL)

0.15

1,082

29.3

15 Sep 2016

Source: Bloomberg Finance L.P., iFAST Compilations

Data as of 7 November 2024


Reduce concentration risk in the Magnificent 7 with this ETF

In recent years, the Magnificent 7 companies (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, and Tesla) have led the US stock market, both in market capitalisation and as the primary contributors to gains in the S&P 500 index. Portfolios lacking exposure to these companies have generally lagged the broader US market.

The dominance of the Magnificent 7 is evident from their presence in many index and technology funds. However, this presents a diversification challenge. Investors holding multiple funds may unknowingly be overly concentrated in these stocks due to their widespread inclusion. While such concentration enhances returns when the Magnificent 7 do well, it can also lead to significant drawdowns when these stocks underperform. 

The Defiance Large Cap Ex-Magnificent Seven ETF (NASDAQ: XMAG) was launched on 21 October 2024 to give investors exposure to the S&P 500 Index excluding the Magnificent 7. Tracking the BITA US 500 ex-Magnificent 7 Index, this strategy mitigates concentration risks by omitting the seven highly weighted stocks. 

As of 7 November 2024, XMAG’s largest sectors include Financials (18.97%), Information Technology (17.92%), and Healthcare (16.03%). Its top three holdings are Broadcom Inc (2.31%), Eli Lilly & Co (1.97%), and JPMorgan Chase & Co (1.84%).

Figure 2: Sector Breakdown of XMAG

Table 3: Top 10 holdings of XMAG

Rank

Holding Name

Sector

Net Assets (%)

1

Broadcom Inc

Information Technology

2.31

2

Eli Lilly & Co

Health Care

1.97

3

JPMorgan Chase & Co

Financials

1.84

4

Berkshire Hathaway Inc

Financials

1.72

5

Exxon Mobil Corp

Energy

1.54

6

UnitedHealth Group Inc

Health Care

1.50

7

Visa Inc

Financials

1.43

8

Mastercard Inc

Financials

1.23

9

Procter & Gamble Co

Consumer Staples

1.14

10

Home Depot Inc

Communication Services

1.14

Total

15.84

Source: Bloomberg Finance L.P., iFAST Compilations

Data as of 7 November 2024


As XMAG is the first and only ETF offering exposure to the S&P 500 excluding the Magnificent 7 tech giants, it has no direct peer . However, investors wishing to reduce their exposure to the technology sector can also consider the Invesco S&P 500® Equal Weight ETF (NYSE: RSP), which tracks the S&P 500® Equal Weight Index. This index equally weights each stock in the S&P 500 Index, increasing allocations to smaller companies and reducing concentration risk. 

Table 4: Comparison against other peers 

Name of ETF

Expense Ratio (%)

AUM

(USD mil)

Average Daily Volume (‘000)

Inception Date

Defiance Large Cap Ex-Magnificent Seven ETF (NASDAQ: XMAG)

0.35

6.4

48.1

 21 Oct 2024

Invesco S&P 500® Equal Weight ETF (NYSE: RSP)

0.20

70,096

5457

30 April 2003

Source: Bloomberg Finance L.P., iFAST Compilations

Data as of 7 November 2024


BlackRock unveils new AI ETF amid the AI boom

While artificial intelligence (AI) has been around for decades, its prominence surged with the launch of ChatGPT in 2022. Generative AI has sparked widespread interests in AI’s potential, accelerating adoption across both consumers and businesses. This shift is not limited to generative AI, as other forms of AI including machine learning and automation, are also experiencing broader integration across industries. According to the International Data Corporation, global expenditure on AI is expected to double by 2028, reaching USD 623 billion.  

The iShares A.I. Innovation and Tech Active ETF (NYSE: BAI) was launched on 22 October 2024 to capitalise on the AI revolution, which many believe is still in its early stages. BAI is an actively managed fund that seeks to maximise total returns by investing in a concentrated portfolio of 20 to 40 global AI and technology stocks across all market capitalizations. It targets companies across the AI stack, including infrastructure (cloud infrastructure, accelerated computing, power), intelligence (AI models, data), and apps and services (services and solutions, data software and tools, applications)

As of 8 November 2024, BAI primarily invests in US-domiciled companies (82.33%), with small allocations to other countries such as Taiwan (6.02%), Germany (2.41%) and Japan (2.23%). Sector-wise, holdings are heavily concentrated in Information Technology (70.95%), along with a notable 12.33% allocation in Communication Services. 

Among BAI’s 34 holdings, the top three are NVIDIA Corp (11.59%), Microsoft Corp (8.39%) and Meta Platforms Inc (5.00%). 

Figure 3: Geographical Exposure of BAI

Figure 4: Sectoral Breakdown of BAI

Table 5: Top 10 holdings of BAI

Rank

Holding Name

Sector

Country

Net Assets (%)

1

NVIDIA Corp

Information Technology

US

11.59

2

Microsoft Corp

Information Technology

US

8.39

3

Meta Platforms Inc

Communication Services

US

5.00

4

Broadcom Inc

Information Technology

US

4.19

5

Astera Labs Inc

Information Technology

US

4.15

6

Taiwan Semiconductor Manufacturing

Information Technology

Taiwan

4.12

7

Amazon.com Inc

Consumer Discretionary

US

3.79

8

Oracle Corp

Information Technology

US

3.41

9

Cadence Design Systems Inc

Information Technology

US

3.31

10

ServiceNow Inc

Information Technology

US

2.43

Total

50.38

Source: Bloomberg Finance L.P., iFAST Compilations

Data as of 7 November 2024


BAI comes with an expense ratio of 0.55%, and some of its peers include the Global X Artificial Intelligence & Technology ETF (NASDAQ: AIQ) and the Robo Global® Artificial Intelligence ETF (NYSE: THNQ), both of which have higher expense ratios of 0.68%. 

Table 6: Comparison against other peers

Name of ETF

Expense Ratio (%)

AUM

(USD mil)

Average Daily Volume (‘000)

Inception Date

iShares A.I. Innovation and Tech Active ETF (NYSE: BAI)

0.55

20.2

68.8

22 Oct 2024

Global X Artificial Intelligence & Technology ETF (NASDAQ: AIQ)

0.68

2,274

279.7

15 May 2018

Robo Global® Artificial Intelligence ETF (NYSE: THNQ)

0.68

138.7

11.7

7 May 2020

Source: Bloomberg Finance L.P., iFAST Compilations

Data as of 7 November 2024


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