Bonus: Zach Riaz & Kanish Chugh – The future of megacap tech stocks | ETF Securities

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going?

Alec: [00:00:31] I'm very good. Bryce I'm pumped for this episode. We are talking about a group of companies that will have driven the market have made most people listening. Have made us a fair bit of money. Yes. And some of the there might be some of the biggest companies, but they're also some of the most innovative and exciting companies in the market.

Bryce: [00:00:52] That's it. And we have an expert here to help us talk through some of the companies that are in the FANG Plus ETF. It is our pleasure to welcome Zach Riaz to the studio. Zach, welcome

Zach Riaz: [00:01:02] Thank you for the kind introduction.

Bryce: [00:01:04] So Zach is the co-founder of Banyan Tree Investment Group and manager and advisor on $3.5 billion across equity and multi-asset strategies. So plenty of experience, and we're going to be picking Zach's brain on all things tech stocks that Ren was just talking about. So this is part of a series with ETF securities and about their FAANG Plus ETF, which is an equal weighted ETF providing access to 10 stocks Baidu, Alibaba, Alphabet, Apple, Tesla, Microsoft and VIDEO, Amazon Matter and Netflix. Zach, all the big hitters are in there.

Zach Riaz: [00:01:40] That's where all the innovation is coming out of.

Bryce: [00:01:41] That's it. That's it. So let's kick off about FAANG Plus. So for people unfamiliar with the term, let's start with equal weighted. What is equal weighted and how does it differ from market cap weighted?

Zach Riaz: [00:01:54] Well, as the name suggests, equal what is essentially every stock, every company, regardless of its size risk, is positioned in the index at the same weight. So, you know, essentially average and obviously market weighted is where the size of the company, and invariably that also means a risk associated with it. This taken into account so market cap is essentially, you know, your price times the shares outstanding so the bigger companies can drive the index. Now, how are you going to think about it? Is I think it's very relevant in some parts of the market, especially as you start becoming a lot more consolidated into the indices. You look at the Australian market, right? Your big drivers, your banks are your big drivers, your materials. So if you're invested in a market cap weighted approach to those index, then you're really taking a bet on the big banks and you're taking a bet on the matures and what happens there. So what we tend to do is if we're less positive or how we advise clients. If you are less positive on those big sectors that invariably drive the index, then you go more for an equal weighted and average. And what that also means is you get a nice breadth of exposure to economic and economic sectors and industries, but also different business growth rates, right? So these smaller companies, by their very nature, have better growth rates, but they're more risk. And so, you know, in really vibrant, high growth, high economic growth environments, you probably want to be equal weighted because the big companies tend to grow slow and there's a gravitation to the smaller companies. But similarly, in a, you know, in a more volatile or defensive star market, you want to grow Typekit with a large company. So that's where the market cap and market cap weighted sort of index approach. You look at the fangs, right? Google came out with an extraordinary result that not too many people calling it came well above consensus. And whilst the rest of the market took one stock for it to push back into positive territory or thereabouts. And we all know over the last 10 years, as these guys have enjoyed the structural tailwinds behind from the innovation disruption, they've become a much larger part of. Obviously, the Nasdaq, then also the S&P 500. It's how you want to play it. There are parts of it and you know, you could take a satellite plus approaches where you go. Well, the index has been driven by these guys, really. So let me invest in them, and I know they're good, liquid, safe companies. Then I'll take risks with satellite positions and which can be in a slightly more speculative.

Alec: [00:04:23] I feel the equal weighting particularly matters with this ETF because by those what, 50 billion market cap and Apple's $3 trillion? Yeah. And so if you want Biden to have any effect, it's not going to. If it's market cap,

Zach Riaz: [00:04:35] well, it's going to get drowned out, right? And that's right. So, you know, that's the other thing. But do not too many people probably know about it just yet, right? So I think that's why ETFs like this one, the equator approach are also introducing new exposures, not just in terms of the technology, but economic exposures in terms of which markets and which consumers that target. So that's a really good example. Exactly right.

Alec: [00:04:59] So there's 10 companies in this ETF. What ties them together and I guess what separates them from other sort of tech names in the U.S. and China?

Zach Riaz: [00:05:09] I mean, we take a step back and take the premise behind. The ETF and the holding, it's all about innovation disruption, and I think that's essentially what ties these companies together. You know, they're still innovating and I mean the multi-trillion dollar companies. But you just see this deal. You know, we'll get to a little bit later. They're still innovating in A.I., machine learning autonomous or driving cars and whatnot, and they just have the backing of free cash flow and very strong balance sheets. I think I was looking at a figure at the top tech companies combined if cluster $2 dollars on the balance sheet into the liquid cash rate. And just to give you an example, you know, Apple Watch went from nothing to three or four billion dollars in revenue, right? And you know, so these companies have the ability. So I think bring it back to what the core premise behind this ETF is and the kind of companies that own is that innovation and disruption. I think the other thing that probably differentiates this a little bit is that it is at the larger end of the market cap, the liquid. They're well-known companies with generally good earnings behind them, so they're not risk, you know, so you're not taking too much speculative risk in this in markets else. I know the first month has been a little bit different. Where it's been driven by rising use of tech. Stocks have come off duration stocks have come off, but generally they because of the defensive nature, they tend to hold up much better and people gravitate towards US equities and, you know, stocks with good earnings. So I think what the differentiation is also around governance. You know, these are listed in the US, you know, even by doing Alibaba, there's these are ideas. And so there's a obligation once you've listed on how you approach governance and whatnot. I know there's a lot of conjecture around that right now. And the ideas as well. So there's this big differences around that as well. Bryce: [00:06:57] Mm-Hmm. So we recently saw Twitter removed from from the from the index and replaced with Microsoft. I'm surprised Microsoft wasn't in there to begin with. Alec: [00:07:07] Yeah, that's a massive that's a good substitution, I think Bryce: [00:07:10] Yeah, massive oversight. So that begs the question here at Equity Mates, we've been throwing it around the office a bit. When will Netflix get the flick? Zach Riaz: [00:07:19] Yeah. Bryce: [00:07:20] And so for context, for those listening, it currently has a roughly a market cap of one hundred and eighty two billion. The next smallest market cap in the index is 600 Alec: [00:07:29] for an American for American companies. Zach Riaz: [00:07:32] Yeah, yeah. So Netflix is going through a period of influx with its earnings. Its member growth certainly disappointed. I mean, to bring it back to, I guess, how the actual ETF is set up, there's investment committee for my understanding that looks at the market that concerns liquidity, that considers the market cap and then makes a decision based on some rules based numbers as well as to what gets included, is still at their discretion. Now back to the original premise why would a company be included in this particular ETF disruption and innovation? So if I had to take either side of the coin, let's take the the reasons why you would probably look to remove it is the innovation around. Streaming has largely played out right and mainstream. Netflix has absolutely. Yeah, exactly. I mean, you know, I for the last couple of years, I think the eyeballs have moved that have moved away from TV. Your linear programming to non-linear Perry, like Netflix and whatnot, has probably largely played out. Has lifted its game as well. So I think that disruption pays for Netflix is largely done now. They may reintroduce disruption innovation by maybe acquiring a gaming company. Microsoft has gone out and do that. They may try to move in other areas where they're disrupting more. But right now, it's a land grab for Netflix, right? And you know, to be honest, most of us have Netflix. So and the other part of Netflix is that, quite simply, is that they've got to continue to produce good content. So you've got to continue to push that out. And you guys know that, right? Oh yeah. The other thing you can't stop, right? I mean, it's it's the funny thing is I speak to some social media influencers who are starting to get up and they always ask the content. I've got a ton of content because that's what you think about, right? But taking the positive side on Netflix, it has a very strong market position. It's raised its fees as well. So that's earnings. And again, right now it's cash flows. Free cash flows are struggling because it's continuing to invest in it. But like I said, the companies are so big that it can go out and approach innovative markets. You know, whether it's, you know, side markets, alternative market. So yeah, I think it's it's on the question mark, probably for the investment community. Big time. Alec: [00:09:55] So Zach Banyan Tree, you advise a lot of clients on how to build portfolios when you think about an ETF like FAANG Plus, how would it fit into a portfolio? Zach Riaz: [00:10:06] Yes, I kind of touched on it at the start. I mean, we know it's concentrated. We know it's giving you. Exposure to the largest liquid companies are still disrupting and innovating. An interesting thing is they're pretty slow. They're still fairly safe companies. I think the other point is that back to the Netflix point, there are other companies that are knocking on the door to be entered into this ETF. So, you know, think about the innovation that's going on there. So I think how we use or we would consider using this is is basically, look, that satellite core satellite approach, you know, the index is essentially being driven by these large companies. If we look at the recent results, they're still kicking goals as shown by Google and what they're going through a bit of period of margin compression. And, you know, due to labour costs and whatnot, some of that is transitory. Some of that may be a bit more long term, but they're still growing topline and earnings at double digits, right? That's pretty attractive. And especially when rerating has already happened. So we would take the approach that, you know, have this potentially as a core because invariably it gives you the exposure to the market anyway, and then you take other satellite approaches to it. Or you can just go, Look, I'm a long term investor. I expect the investment committee to keep introducing innovative disruptions. I know that's where the place is to be, where I was just reading the latest KPMG surveys from twenty twenty two as well management teams. I only think about one thing how do they actually disrupt and innovate their own businesses and sectors? So in Candace tech stocks? But yeah, that's how I would largely use it Bryce: [00:11:40] and then say, how do you think about the fact that a lot of these companies a trillion or more like massive and still pumping out reasonable growth? But I guess at a trillion dollars, you've got to ask, how do they get to two? How do they get to three trillion? Alec: [00:11:55] You didn't have to ask Apple. Bryce: [00:11:56] They just latest three percent. But yeah, so how do you balance that with thinking about, you know, looking at other ETFs or opportunities that feature those smaller tech companies that have that growth coming through Zach Riaz: [00:12:08] back to the earlier point that you can take that satellite approach, you know, you can have these guys as your cornerstone and know there will be changes within that will generally lead to higher earnings and disruptive innovation outlook. But then you can mix that up with other tech stocks. But the whole notion around that is if you look at the recent sell off, some of those tech stocks are down 50, 60, 70 percent. Now, that's not to the risk liking of too many, you know, too many people, you know, so. And mind you, a lot of people have made a lot of money out as well on paper. But if you followed it up and down, then you know, so I think you've got to keep in mind how much risk you are willing to take on. But that's sort of a satellite to core approach is probably the way to go. Alec: [00:12:48] Yeah, yeah. Yeah, I think and I haven't checked all of them, but I think all 10 are profitable. That doesn't sound right. Zach Riaz: [00:12:57] From memory, I think, yeah, yeah. Yeah, I think some of them are hitting the earnings numbers. So bottom line, maybe different story. Alec: [00:13:05] Yeah, yeah. And I guess like that's the difference between the these companies and, you know, like the Peloton's and the Zillow's and those those kind of tech names. Zach Riaz: [00:13:14] And and it's interesting point about, you know, earnings and how much reinvestment you do. You look at Google and Amazon, they're investing a lot more on Amazon's investing a lot in its fulfilment centres, right? Because it knows it's number three player in online shopping in globally number one in the US right now. For it to reach a higher positioning, it needs to have same day delivery, has fulfilment centres, need needs, have presence to be able to deliver, you know, same day or a couple of hours delivery. So there's still a lot of investment that needs to go in this. And when you see and whether you agree with or not, when they see the growth trajectory in front of them, when they see the change in consumer behaviour, some of these guys are saying I'd rather not banking the bottom line just yet and rather reinvest. You look at Google right now, Google's income, Alphabet's income is driven by its search, solid as solid business, in fact goals. But its cloud business is still negative. And you know, it's it's up to, I think, twenty two billion dollars quarter revenue. They see such a gross long growth runway there. You know, as investors, if you're giving me a good right of return on my investment, I want you to keep investing rather than give me in dividends. You've got to practise that with a sense of caution as well. But like I said, there are companies small, speculative stocks that use that excuse to keep pumping in, and maybe the future returns are not likely to eventuate. So that's where you still go to these latter. But yeah, you know, there's that reinvestment question is also important. Alec: [00:14:45] So Zach, we've briefly touched on a few of these companies, but we love going deep on a stock and Equity Mates and so would love to choose two of the 10 companies in this ETF and go a little bit deeper on them. Cover what the company does, where the company sees its future and where its future growth coming from. Any key competitors? And then because we want to play both sides here, what the bull in the bear case may be. So our deal is. Always happy for you to choose the companies that excite you the most. Is there one in particular you want to start with? Zach Riaz: [00:15:18] Well, let's talk Amazon and Google right to two and I think everyone knows them. So but what I want to do is as any investor, especially professional investors, these companies are so wide ranging you want to just bring it back to what really matters. And essentially, that's what you're asking about what's going to be the catalyst for these guys going forward in terms of a returns perspective. So let's let Google first search is great. Absolutely killing it. And what they're doing with A.I. machine learning and just the way they're bringing new products for you and AI to promote so much more seamlessly right across the different platforms and properties is it's amazing, right? So one A.I., I don't even have to put in the keywords and bidding for it. I will tell them this is what I want our return investment. So I want return on consumer eyeballs or whatever it is, and it will go bid across platforms, right? That kind of innovation. That's why the kicking goals with this search. But what's what's the kicker here? I think one of the kickers for them will be for Google will be YouTube. Now what the valuation on that is. YouTube was bought for $1.6 billion back in the envelope numbers, currently three to $400 billion. That's about 15 years worth of work, right? That's not bad, right? He's looking at me disgusted. Alec: [00:16:37] There was some start that it was like Google makes now makes $1.6 billion in revenue every like three weeks or something. Zach Riaz: [00:16:44] Are you're going to be crying? You feel this sellers, right? I'm sure that. Alec: [00:16:47] Well, yeah, I'm sure that they're probably billionaires. But but what? Zach Riaz: [00:16:51] Again, it's a great example of what a large company with great market position was able to bring a really good idea and really put a rocket underneath it. So what the value of Google and YouTube is important how they can increase the memberships having increased advertising that cross-pollination between search and stuff, the seamless pollination is another growth driver. I think this conjecture around, you know, we're talking about antitrust issues, to be honest. If you look at Google, some of the parts are looking pretty decent as well. To be frank. So that's one for Google and YouTube. I think again, I'm not. I don't think I'm telling you anything rocket science. I think this is out in the public as well. The other part really is cloud. So they're doing really good kicking, kicking goals and cloud the picking up some really big names and also the run rate. They're still making a lot. I think that's quite small relative to exactly IWC and Microsoft, but that, for my perspective, is still rising. Tide lifts all boats. There's a lot to go around. There's over a trillion dollars in it spend. There's still a lot to go in infrastructure as a service and which is probably becoming a lot more commoditized, but platform as a service, right? And when you seamlessly connect to other properties and whatnot and ability to give you a much broader view and target audience, it's a powerful. So I think what Google Cloud can do from an earnings perspective and what YouTube may do. And then again, just the A.I. machine learning there to making that search seamless, it just blows your mind. So that's that's the key catalyst for me for Google. Like I said, growth rate will moderate a bit, but you still hitting those mid digits double digit numbers. Bryce: [00:18:33] Is there a bear case for Google yet? Zach Riaz: [00:18:36] Absolutely. Bryce: [00:18:37] Absolutely. Going to be Zach Riaz: [00:18:40] OK? Bryce: [00:18:41] He asked. Jaycees was trying to get a bit of a return Alec: [00:18:44] on students now just James or Oscar? Yeah, said the big cases. Zach Riaz: [00:18:49] This right, the bear case is that the cloud becomes so competitive that they don't make the earnings and the margins, so he is expected to reach 30 fine margins. That's what you probably, you know, also sort of expect over time for Google so that it hit the margins disappoints, right? Due to, you know, how quickly innovation is happening. Some guy comes up with another platform and eyeballs and everything goes there again. The, you know, the eyeballs tend to just, you know, either being captured, they're in other places, but Google and Amazon probably buy it out anyway. Exactly right. So. And the other bear case is, I think what's really important to understand is what was the winner of last year may not be the winner of next year. Just look at who were the leaders of who the leaders in early 2000, it was Microsoft. You know, the other big names, some of them are not Exxon. Some of them are not even here. And some of them are going to probably completely evaporate, right? So I think that keeps me up at night that what will Google? How can Google Story really follow? Bryce: [00:19:58] Yeah, it's tough. It's just it's hard to think like that with Google has 98 percent dominance in, Alec: [00:20:04] well, it's not. He's like, he's a bear case. We no longer need internet search because Elon Musk puts microchips in all of our brains and the search. Functionality is no longer needed, Bryce: [00:20:14] but it's searching through Google to go into our Zach Riaz: [00:20:16] brains. Well, if you believe some of the conspiracy theories, I have had my jabs and apparently I can talk to Bill Gates through the chip and. Alec: [00:20:25] Yeah, but it's hard being so Zach Riaz: [00:20:29] tough of the searches that come up. No. Look it. Yeah, it is an issue. And the other point is these guys are competing for talent. Talent like yourselves are saying, I can do this on my own. I don't need to do this. So that's a big thing. And in fact, the other company, Amazon, that's one of the sore points, four billion dollars extra in the quarter because I couldn't find people and Bryce: [00:20:51] it's up to their base salary, I think from to touch base salary cap from 229 to almost 500k. Yeah, like their base salary cap was two hundred and twenty nine thousand across the company, and they've now up that to half a million. Alec: [00:21:05] The amount of money. My biggest regret is I didn't study computer science. Well, let's talk about that to my grad. Bryce: [00:21:13] Let's talk about Amazon, the similar case. What's what's going to take it from that through the next year? Yeah. Zach Riaz: [00:21:19] Look, I think with Amazon, the one thing they started splitting out is the advertising piece. So that's about $9 billion. That's important again. You know, they've realised they've got all these properties and they can and they've got these three third party sellers and they've got these market positions. You know, they can again seamlessly include AI, ml and innovation to help these guys promote their products, their services. And that's something that's a that's a real growth area. And the other part is the growth part is cloud. You know them. They're trying to move away from just providing a basic infrastructure, which will become commoditized to becoming a more platform that include that equates to higher gross margin. And so I think one of the positive case for Amazon is people are looking for that cloud computing business to register about 35 35 percent in margin as it gets to maturity. So now the downside case really is that look, these disruptions and wages pressure on wages is more elevated and remains elevated. I mean, there's a really good example they gave during the recent quarterly update was that because of American, they had people getting off work who couldn't come back until they got a test that took out more people in. So they were paying two to three times for the same position because that and now you think that should settle down and they're saying that. But you know, as you just said, they've upped the ante on wages in general, right? So and they've got away with paying pretty, you know, pretty attractive rates. So it's the cloud. It's what can happen with obviously the advertising. And then also, you know, there are some markets that, you know, in terms of the three peat, the products that big in retail, e-commerce and whatnot. I'm sorry in entertainment apparel, but there are other markets that their sectors and industries are not being like food and whatnot, which is which is a growing category. So those are the key things, and the bear case is really the opposite of that. Again, you disappoint your already trillion dollar company. People start moving to slightly other parts of the market. Alec: [00:23:20] The other question, I guess, is the Jeff Bezos transition. So, you know, he was probably the best business person of our time just taking retail and just turning it on its head. But he's now leaving the business and seems to be living in a gym. Yeah, I was just going to say sorry, but you know why he's Zach Riaz: [00:23:41] he had to buff up for all the obvious reasons right now is slightly got a new equity partner? Yeah, yeah, Alec: [00:23:49] yeah, yeah. But Andy Jassy has taken over who is started the IWC business. How do you how do you think that transition is going to go when, like legendary founders, leave companies and hand it over? How does that gone historically? Zach Riaz: [00:24:05] Yeah, it's a very good question. I think it's important now generally for most companies of a reasonable size. I think not enough credit is given to middle management and the second team manager above the above, the CEO or the founder, right? Absolutely. No doubt the founder brings vision, energy and motivation and everyone follows it. But I think the execution part, which is the most important part, our people on the Moon. That's great, man. No. All right now, give me the game plan, right? So Elon Musk is great a guy. We're just going to do this, and he's smart enough to start the process and get. But then you've got people coming. But what we'd like to think is when you're a couple of trillion dollar companies, you've started to prepare people in those roles to take over because they're already doing the executing. Does a bit of the vision fall away? Perhaps. But there's, you know, there's two other personalities that can pick up the pace. So we're we think it's big enough for it to just not just fall off, but some of these guys are very capable in the second and third tier management. And I think it's been well planned. And look at the end today, some of these found. Are still very much exposed and leveraged to how the equity prices and performance Alec: [00:25:17] of the company goes, so I feel like the whole vision question can't really be asked with the new Amazon CEO because I think the story and correct me if I'm wrong. But the story was they have, like Bezos, had someone shadow him for a year. And like everybody, it was someone new. When Andy Jassy was shadowing Bezos when it was a retail company and he had the idea of selling their excess server space and started Amazon Web Services. So in terms of vision, like it wasn't Bezos that came up with that idea. Zach Riaz: [00:25:43] And this is the thing, right? Like I said, I want to go to the Moon. Well, let's go to Moon. Let's go to Mars. Yeah. So it's the people that you surround yourself, right? And Amazon, you know, Google and Apple. Honestly, the guys at the top were really good at selling the division. You know, there some really smart guys below, you know, the Apple founder, there's some really smart guys below the Google founders, right? So you got to give credit there as well. And and you agree that I think it is a brains trust that is coming up with this. And you know, like I said at the end of day, vision is one part. Execution is another important part. And as investors were more interested in execution, Alec: [00:26:27] there's some very successful transitions. Tim Cook taking on Apple has been trillions of dollars worth of success. Eric Schmidt taking over Google again, like incredibly successful. Steve Ballmer taking over Microsoft. Not, not so much. There's some funny stuff there. Yeah, I put him as the most undeserving billionaire because Microsoft just languished, but he managed to become a billionaire out of it. Yeah, stoked. So and now he owns an NBA team. It's like, that's the life that I want. Zach Riaz: [00:26:55] Oh, exactly. I look, there are plenty of positive and I mean, Tim Cook and took on the attire. So, you know, there's always pros, there's always positive stories, negative stories. I think that's something you always watching with Amazon. You've seen the founder already starting to walk away, and that's when the interesting thing is right with some of these companies, Google still the CEO is on the equity analysts briefing every time. Most of the briefing is done by the CFO and and other guys, they know the business better than the CEO. I can tell you that, right? So there are some guys I can say the Google of the Alphabet CEO. He's always on answered questions from analysts, but the other guys, you just don't even go on. You know, so yeah, I like I said, I think it's something we look out for in a smaller company. I feel it's a it's something we pay a lot more attention to because it can often lead to a change in strategy, which could either mean more investment. Your return profile looks different, your risk profile looks different. Here, I think the innovation and what's harder to achieve is largely set and and the other bits. A lot of these companies have this other bits, right, where they try to waste their money on something out of the out of the world. That's still a small part, so it can't eat into what is generally still driving the overall shareholder value. Hmm. Bryce: [00:28:14] Well, Zack, there's no doubt that these companies are going to have to continue performing incredibly well, put on another trillion, another trillion thereafter. But it's exciting to think what they will achieve if if they do hit that three five, I don't know, $10 billion company one day. Who knows? Alec: [00:28:29] But yeah, what's after a trillion? I don't know. A zillion is a quadrillion. You know, Zach Riaz: [00:28:35] look, the returns are how do you get equity returns, share price appreciation, capital management, dividends and think at some point these guys might just go up the ante and become a Telstra? They're going to pay you seven percent. Yeah, yeah, yeah, I'll pay, you said. And you know what? And these guys are already already buying back shares, right? Right now. Fifty billion dollars of share buyback doesn't make a difference, right? You get to a point where you're saturated. If you had to ask me and there's a couple of ways shareholder value could unlock apart from just rising market cap a break-up value. Like I said, I equate to better companies, better capital management and dividends, shareholder returns and or they can just continue to just eke out that 10 to 15 percent per annum at a nice margin. Bryce: [00:29:18] Can't complain with that. Well, we are about to hear from Kanish, head of distribution of ETF Securities, to unpack the ETF in a little bit more detail. But Zach, thank you for coming in and sharing your time and really highlighting, I guess, the significance that these companies have in the ETF and why they're important. And you know, it's really exciting just keeping track of these and a lot of the Equity Mates community is invested in are invested in these companies as well. So we appreciate your time. So it's our pleasure to welcome Kanish Chugh to the studio. Head of distribution from ETF Securities. Kanish. Welcome and happy New Year! Kanish Chugh: [00:29:56] Bryce Thank you for having me and happy New Year to you, to both of you as well. Bryce: [00:29:59] So we've been chatting all things Fang with Zach, and we thought we'd close out the interview to get a bit of an understanding of the actual ETF itself from you. So let's start at the top. Why create an ETF like Fang? Kanish Chugh: [00:30:17] We're all about trying to create innovative products and unique products as well. So we launched this ETF. It's the the ETFs FANG Plus ETF. So the code is FANG. So quite easy to remember. We launched it in 2020, so literally just as the markets were starting to drop so late, Feb early March. And the idea behind it was to give investors an ability to assess what they wanted in a larger way. So the Thing ETF gives you exposure to 10 stocks equally weighted in the mega quality, highly innovative, disruptive companies such as, you know, Amazon, Apple, etc. But from their perspective, how would you get exposure to those stocks so an investor could? Yes, they can get direct. They can go directly by a number of different platforms. They can buy one of those names or a few of those names, but they have to choose which of those names. And you know, we spoke about single stock risk and that exists in a big way. And we've seen over the past 12 to 18 months with this. With these names, they could access these names via an active manager that focuses on, you know, quality growth. And there are a lot of them out there. Some get a bit more media than others more recently. And unfortunately, some also underperform the benchmarks. And then you could also ask the very broad index, such as the S&P 500 or the Nasdaq 100 index. But by doing that, you also get a lot of other names. So the feedback that we got was we were clients were saying, we want to go overweight these mega quality names, how do we do that mega-cap quality? So we launched this ETF. It's now got just around 200 million under management. And you know, it's been around coming up to two years now. So one thing about this ETF that we quite appreciate is that it is equal weighted, which is quite uncommon for Australian ETFs. So explain to us why equal weighting was important when we're talking about these mega-cap tech stocks. It's interesting, I guess, to firstly, they you, you call them megacap tech, and some of them are tech. Some of them are not taken on Amazon. It's a consumer company, Tesla, it's an automobile company, but they're very involved in disruptions of tech. Yeah, I think nowadays is a very loose word. But on the equal weighting aspect, a big part of that is if you were a market cap white, this index and these 10 names that are in there, Apple would be the biggest way. Microsoft would be the second biggest way within this ETF, and they would then dominate the contribution to the performance of the fund. Now that may be right or wrong because you may say, well, the biggest company in theory should be dominating. But in an area where all of these companies are innovating and they're disrupting in multiple different revenue streams, you know, whether it be cloud computing, future mobility, gaming, metaverse, you know, e-sports or even consumer automation, logistics, like with Amazon, you want each of those stocks to contribute to the performance. So, you know, in the same way, investors look at diversifying their portfolio, an equal weighting approach in certain instances actually allows you to diversify the ETF's portfolio in a much better way than a market cap weighted approach would, which would be the largest name would have the biggest voice here. Each of the names have the largest voice, whatever their size, and they are big companies anyway. There are 10 of the biggest companies in the world, but still. Bryce: [00:33:41] So just to quickly whip through them, we've got Meta, Netflix and Nvidia, Amazon, Microsoft, Alibaba, Tesla, Alphabet, Apple and Baidu. I guess that begs the question why these holdings and I think recently you booted out Twitter. Alec: [00:33:56] Twitter got booted from Microsoft. Yeah, yeah. Tesla and Nvidia. How long have they been in there? Kanish Chugh: [00:34:04] The index has been around for over five years now, so those 10 names have been there for those five years. They were seen as being the the most innovative, disruptive leaders in their spaces. And when you think about disruptive trends, so you know, we have a lot of thematic ETFs. This is a very easy way to access multiple different themes. You know, whether it's the e-commerce, whether it's future mobility, whether it's cloud computing, you know, this is a very simple way to do that. Alec: [00:34:34] Kanish, when we speak to you about these ETFs, we like to finish with, I guess, talking about what the future looks like for an industry that we're talking about. It's a little bit harder here because these ten companies are spread across multiple. All industries in a couple of or in many countries are going to ask it to, you generally feel free to take it whichever way you like, what's the future prospects look like for some of these major tech and huge disruptors? Kanish Chugh: [00:35:02] I think on the whole, a big concern at the moment in the macro environment is rising rates of inflation, and a lot of people are concerned that the impact that that would have on growth stocks. And there's a belief that some of these names are all of these names are linked very much to growth. I sometimes would counter that and saying yes on companies which don't have strong fundamentals, strong cash balances, strong earnings, strong revenue streams and diversified revenue streams. You could say that in the long term or in the rising interest rate environment would have an impact in the short to medium term. There's going to be noise, and we've seen that with some of these names dropping and you know who's starting to have their stock price affected. But in the long term, you look at, say, a Microsoft last year its cloud computing business, which is the second largest in the world behind AWOL from Amazon. So Microsoft's cloud business is called as. It had a 40 percent increase in revenue on a quarter and topped analysts estimates for the 11th straight quarter at the time of the rebalance in December. You know, its Office 365 software, which a lot of people are using now post-pandemic because it's a very easy, cloud based solution we all remember or not all of us, but a lot of people would remember the seeds that you'd have to go by. Now it's a whole cloud based Office 365 is up 23 percent for the first quarter for the financial year 21, 2021 2022, and then with Microsoft just standing on that day, recently acquired Activision Blizzard. So they're looking to get into gaming e-sports very much more so and taking the fight in a big way and dominating that gaming industry. When you think about that Xbox, and that was a 96 billion US dollar acquisition, the third largest gaming company in the world, so they're been very much making some big plays. You talk about Facebook has been absolutely hammered recently in the first time it's seen as active growth rate in some in terms of users a drop since it launched. I think a big thing, though, with Facebook is in the past it has gotten out of tricky situations through acquisitions, so that would be something to keep mindful of. Its earnings are still quite strong, though, and I think that's the other thing. When you look at all of these names, a lot of these companies have very strong earnings. Tesla's recently started to turn a profit. You know, Amazon, it has multiple different revenue streams from its the largest cloud computing business in terms of IWC to is actual bricks and mortar, you know, bread and butter revenue stream of the Amazon store. I think a key part there is quality, and that's that's what I sort of try to hone in on is these names are quality industry leaders, a quality growth names. So yes, in a rising trade environment, you may not want to have exposure to quality, but with a lot of these names, you would say OK for the long term. And that's the other thing from an investor standpoint, what are you investing for? If you're investing for three six months? Well, then yes, you're going to have some extreme volatility with some of these names. If you're investing for five, 10, 15 years, it would be very hard to bet against. Some of these names, like Apple, has been around for 30 years. Its earnings are growing still, while some lower, you know, sub sub tended to still double digits in a 12, 11, 12 percent. But still, that's very strong considering for a three trillion dollar company. Bryce: [00:38:18] I just have to laugh that companies such as Microsoft, Apple, these absolute giants are still lumped into high growth Alec: [00:38:27] while they're still growing. Bryce: [00:38:30] it's crazy what they're able to do. Alec: [00:38:32] The one that I think it will get the flick next is Netflix. It feels like it is more and more an outlier in that basket of stocks. This index is US listed companies, so there some Chinese names, but the US listed. Otherwise you'd think Tencent would get a run over Netflix. But you know, Adobe is 30 per cent bigger than Netflix. Disney is $100 billion bigger than Netflix. Let's get rid of them. Bryce: [00:39:02] Well, you can take it up with with the FANG Plus Index Kanish Chugh: [00:39:06] will take it up with the index manager. So obviously, as an ETF, we simply track that index from from the NYSE FANG+ index. You know, we follow implicitly what they do, and it's been, you know, from our point of view, it's a quarterly rebound to every quarter. Those 10 stocks get re weighted and potentially they do change. And we've seen that obviously recently. It is again, the ETF is also innovating with the times. And the reason why off was that it was because of its growing cloud revenue business and its e-sports as well. Alec: [00:39:34] Yeah. And I think that's a really important point because Twitter, I mean, it was disruptive, but Twitter as a share as an investment hasn't been great for shareholders. I have been a Twitter shareholder for a long time, so I resonate with that. But the idea of having the 10 most disruptive companies, but also having people updating that index to make sure they are the most disruptive companies is great. Means you're not stuck holding Twitter like me. Bryce: [00:40:02] So it sounds like that, you know, this is an ETF for people that might not want to be exposed to single stock risk, but want access to these high growth, high tech, high end innovation companies that we've spoken about. For more information and so that people know that it is the right product for them, where should they be heading? Kanish Chugh: [00:40:22] Sure, the best place to go to the ETF Securities dot com got a website? If you click on products at the top, you'll see our entire product range and the Fang ETF is there under what we call the future present range, which has all our thematic ETFs, etc. So that's the best place the PDX, the TMD and a few other useful content and articles and insights into the ETF. And also, we can always see it on a daily basis. With the weights of those names, I see it's only 10 names and they don't have an unchanged bias in between the quarter. Don't end it all during the quarters if they want to say, you know, currently, for example, as opposed to just bring it up now, the top weighting actually is Baidu. Yeah, and it's got a 12 percent weight in the portfolio. Apple has 11 percent, Alphabet has ten point eight percent, so people can actually go in and actually see what what's going on there. Bryce: [00:41:09] Yeah, love it. So head to the website if you're interested in to find out if it is right for you. And thanks Kanish. We love what ETF securities are doing, always providing innovative options for for the retail investor and we are. We're back next week with you to also chat about another of your ETFs that is certainly, you know, providing a lot of opportunity for our community as well, and that's the robo ETF. So looking forward to that one, but thanks for your time. Kanish Chugh: [00:41:34] Thanks. Look forward to that conversation.