XT: It’s still one of my best ways to take equity risks going forward

How can a conservative investor find ways to take on more risk with a portion of his investment portfolio? This is the question I have been asking myself for the past 30 years. I am the son of a man who grew up in the time of great people Depression, and this experience governed his style as a self-directed investor during the last third of his life. While I am ready to earn as much money as possible, whenever and wherever I can. An “all-weather” investment approach.

But as nice as Treasury bills and the tactical management of a 40-stock dividend portfolio, surrounded by “tail risk,” all options combine to put an end to downside risk in almost any market scenario, investing isn’t just about protection. It’s about growth. And for some, speculation. I’ll leave the speculation to others, and focus here on one of a small number of ETFs I use in various places times and with varying portfolio weights to keep track of the “wild side” of my investments.

iShares Exponential Technology ETF (Nasdaq:XT) is the one I wrote on in the past. In fact, since my initial analysis of it on 11/29/2022, over 18 months ago, I have written on it 4 times. This is the fifth. Far from “taking fifth” on XT, I’m reiterating why I see it as a great way for a conservative investor like me to sprinkle some exposure to high-octane stocks into my portfolio in a diversified and transparent way. I currently have a small position in XT in my ETF portfolio, which is the main “partner” portfolio to the YARP hedging dividend stock portfolio I’ve been writing about here recently.

And although this ETF portfolio (actually, I have a small put option position because that’s how I trade) is straddled in T-bill ETFs and a mix of long and inverse positions, XT is the “wildcard” that often… I use it uses. this is the reason.

XT: It takes some risk out of the risk

XT has shown relatively low downside risk compared to other places I have dabbled in the “risk seeking” portion of my portfolio. XT has a heavy focus on technology (59% of ETFs currently, with healthcare being the only sector that represents more than 6% of assets). However, as the top holdings show, this ETF owns a wide range of technology stocks, and is highly diversified, with over 200 stocks. Typically, I prefer more concentrated ETFs. But this is risk-seeking territory for me, so my natural conservative nature steps in and finds a “happy medium” in the XT. I can own a piece of Nvidia (NVDA), Coinbase (COIN), Micron (MU), and many other market leaders, but I do so in smaller amounts. This also means that I’m willing to occasionally raise my allocation to XT to a much higher portfolio allocation, since that removes the risk by having most stocks occupy less than 1% of the fund.

From software, to manufacturing and consumer applications, to the topic of artificial intelligence dominating the headlines, technology has completely transformed the world of business and financial markets. This may not be breaking news to anyone, but it is here to stay. Although risk is not exactly what investing in technology stocks is, it is highly correlated, so to speak. I made the case that technology should be its own equity asset class, as we’ve seen that over the past five years (below).

That’s a triple in the technology sector, a weakness in the overall stock market, and a 69% advance in the pre-Tech S&P 500. Technology and the rest of the market have been on different planets over the past half-decade.

XT has lagged all three of those companies over the past five years, with a cumulative return of 63%. Why should I care about him? Because I’ll keep hitting the table…

…Past performance guarantees us nothing but feeling overconfident when we buy something!

AI stocks are moving the market right now, and that’s great for big holders. But I’ve seen this movie before, and it was called “The Dot-com Bubble.” So I think investors have two choices about risk following what we see in the chart above: move cautiously and tactically around areas of the market that may be obscenely overvalued, or just hope that past is prologue. I’m taking the former route, which is why XT is part of my small basket of ETFs that I consider my “go-to” group when I want to increase my technology allocations at least temporarily.

XT owns dozens of stocks that have benefited from the AI ​​boom. ChatGPT itself has captured the attention of companies, investors, and students around the world. The scary part is that most of us have no idea about the massive power behind it. What investors need to understand is the real growth potential within this sector… but also the risks of being outdone, with shares being bought without regard to valuation, or at levels that pressure companies to deliver unreasonable levels of earnings and income. Profits.

Do you remember the dot-com bubble? I do, and it impacts my investing process, 25 years later.

One of my memories of the dot-com era was when the CEO of Sun Microsystems told a group of analysts that in order for his company’s stock to justify its price at the time, he would have to run the company without any expenses for 10 years. . Obviously that’s impossible, but 10x sales is basically what that means.

So, while I like XT for its lineup that includes leaders and relative newcomers in industries like semiconductors, cybersecurity, cloud-based software, and more, I think in smaller amounts than, say, a buy-and-hold Nasdaq 100 ETF, which the company owns. XT has some of the same stock, but in allocations several times what XT is regulated to allow. Again, this is where equal weighting suits me, because I’m bullish in the long term but cautious in the short term about “innovative” space XT patrols.

For those who are less familiar with the underlying business trends that make innovative stocks worthwhile these days, here’s a quick summary. Cloud-based technology and software can hold and organize endless amounts of data, making it more accessible and more convenient. Computer chips and their memory capabilities affect and benefit millions, if not billions, of people every day. With everything being accessible online, cybersecurity is no longer optional, but essential for governments, businesses, and consumers alike.

The exciting part about XT is that many upcoming emerging tech stocks are among the holdings, and it will only be a matter of time until we see another Nvidia with the next innovative brand. In the same way that a few stocks have risen up the market cap rankings in small-cap indexes in recent years and subsequently been upgraded to the S&P 500, this possibility also exists within many of XT’s 225 holdings.

XT: Sold at 30% off ARKK and QQQ on after sales price

I mentioned price to sales earlier, and with the XT lagging 3.4x in that regard, it’s not very cheap. Unless you compare it to the popular QQQ or ARK Innovation ETF (ARKK), both of which are selling for about 5 times sales. So XT is 30% off on those.

I’m bullish on XT over the long term, but I suspect it will take a better equal-weight investment environment to make it really noticeable. I mentioned that this is my fifth article on XT in the last 18 months or so. This represents half of all analyst articles about the ETF during that period. Despite being an iShares product with $3.4 billion in assets, it is still quite “undercover” and I assume relatively unknown to the Seeking Alpha audience. So I’m happy to be one of the people following the “herd” here.

Headwinds against equal-weight ETFs are one risk facing XT, the other being the recession and its impact on sentiment toward technology. But we’ve seen a “dress rehearsal” for this, and the XT has held up well. See this chart above, which covers all of 2022. The relative return of XT versus the two “risk alternatives” I consider, ARKK and Bitcoin (they show the spot price, not the ETF) speaks volumes to me. This is an equal weighting and more disciplined stock selection process from the iShares Index team, versus ARK’s often headline-grabbing but historically ineffective and high-risk approach.

Below, here’s another look at historical risks. I want to make as much money as possible when taking risks, but the volatility of some of the XT alternatives highlighted here is more than I care to give. This Bitcoin-like volatility is something I would sooner track with call options, where I can limit my maximum loss on the buy side.

My technical view on the XT is pretty simple. The weekly price uptrend is in place. Nothing earth shattering, but solid stability at this point.

XT still makes my limited basket of ETFs that I keep as a watchlist, with the goal of owning them tactically. This means that my position size will fluctuate as I measure the risk of each ETF, and I will own an ETF for weeks or months, although my preference is to own it for at least a year, and hopefully many years. But this is not a market environment where I can put aside what I see in my charts, quantitative analysis, and, most important of all, my vivid memories of technology stocks during the dot-com bubble era.