Technology shares continue to crater: Here’s how an ETF can get you through it
How to get ahead in 2022 through passive investing.
It has been a disappointing couple of months for growth investors, specifically in technology.
Led by the economic recovery, investors now fear rising interest rates.
This change in interest rates is having bearings on technology companies especially in the US.
"Rising rates may mean high growth tech exposures (i.e. with strong earnings potential later but not at present) could come under pressure," BetaShares' chief economist David Bassanese told Finder.
Challenging times ahead
According to Vanguard's 2022 economic and market outlook, returns will be bleak in 2022.
In fact, it is predicted that 2022 will be the lowest returns in a decade.
The US returns are expected to be 1.9–3.9%.
Returns for the Australian equity market are expected to be in the range of 3.5–5.5%.
"In 2021, Australian investors heavily favoured international equities, with AUD$14 billion flowing into global shares ETFs including those that invest in US stock markets," comments Minh Tieu, head of Vanguard Australia's investment strategy group and ETF capital markets, Asia-Pacific.
"We continue to advocate that fixed income products are an essential inclusion in any investment portfolio because it is an asset class with low correlation to equities."
"This means if equities fall, bonds are likely to provide downside protection."
Thematic ETFs to the rescue?
Despite relative softness in the market, broad-based thematic ETFs could provide sector protection.
With the technology sector largely predicted to underperform, thematics could shine.
Even if the label suggests otherwise.
ETF Securities head of distribution Kanish Chugh reminds investors to know what they own, and urges them to understand how it reacts to different market cycles.
"A good thematic ETF is agnostic to sectors, it's agnostic to countries and it starts to have loose correlation with markets," Chugh said.
"We saw that in December, when we had that real drop in markets. We saw our thematic ETFs outperform."
Using the example of a robotic ETF that his company provides, he further notes that it's not purely technology.
"People believe when I look at the theme of robotics and automation, it has to be all technology," he said.
"Yes, you do have some companies that are classified as technology, but if you look at the sector breakdown of that ETF, 39% is in industrials [and] 12% is in healthcare."
ETFs remain popular in 2022
Even with a negative economic backdrop and rising interest rates, ETFs' popularity amongst investors remains strong.
The Australian ETF industry saw its best year on record in 2021 with AUD$25.9 billion in cash flows and AUD$134 billion in AUM, according to Vanguard.
The market anticipates this trend to continue in 2022.
"The extraordinary growth of the Australian ETF industry has, in part, been accelerated by the entry of new retail investors, particularly in the last 2 years as more Australians seek ways to build sustainable income or new avenues to channel discretionary pay," Tieu concludes.