JPM: Blame active not passive for surge in tech stocks

LONDON: Exchange-traded funds (ETFs): the convenient scapegoat of modern markets. But when it comes to frighteningly high technology valuations, that blame is misguided, according to new research from JPMorgan Chase & Co.

The ETF shaming goes something like this – technology shares look frothy because there’s a mismatch between price and fundamentals. At the same time, ETFs have ballooned. Tech funds alone absorbed US$16bil this year.

So, passive investors must have indiscriminately pumped money across the sector without digging into company balance sheets.

Not true, according to JPMorgan’s global markets strategy team headed by Nikolaos Panigirtzoglou. Not only are ETF investors taking an increasingly smaller chunk of technology stocks, they’ve also helped suppress the 63% rally over the past three years.

“ETF investors have been struggling to keep up with the rise of the tech sector,” the strategists wrote in a Dec 8 note. “As a result, ETF investors have been fading rather than amplifying the tech rally since 2014, including this year.”

Over the past year, the FAANG group of Apple Inc, Microsoft Corp, Amazon.com Inc, Facebook Inc, and Google parent Alphabet Inc accounted for nearly a sixth of the gains in global equities, according to data compiled by Bloomberg.

While technology stocks exert a growing influence over the broader equity market, tech funds make up a much less impressive share of the US$4.8 trillion ETF industry.

By October, the share of assets backing technology ETFs hit the lowest level in at least 12 years, as compared to the share of technology stocks in the MSCI equity work index, according to JPMorgan data.

Meanwhile, the biggest global equity mutual funds have held a steady share of technology stocks compared to the world index, the data show.

Combined with ETF investors who have become progressively underweight in the technology sector, it stands to reason that it’s active institutional investors who are responsible for propelling the technology trade, the analysts conclude.