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A Growth Star ETF for the New Bull Market

March 28, 2023

That’s right, the new bull market. As far as I am concerned the bell has rung and we are in a new bull market. We need to find ways to take maximum advantage.

Just in passing, I normally pay very little attention to budgets which are mostly so boring but I notice that this blue in tooth and claw Tory government (I’m joking) is cutting the capital gains tax annual exempt amount from £12,300 presently to £6,000 from 6 April 2023 and £3,000 from 6 April 2024. If they had any guts at all they would abolish it rather than pussy foot around.

You may decide to bank some profits to take advantage of that fast shrinking allowance.

I suppose they think this will appeal to Red Wall voters but I am not sure that as many erstwhile Labour voters as our billionaire Tory prime minister imagines are as won over by anti-aspirational measures as he seems to believe. God Rishi, what an apology for a Tory you are! Give us something to make us think that success in the UK is not a dirty word.

Needless to say the bull market I am talking about is in the US, not the dead haddock that passes for the UK stock market.

IWY tracks 200 top US growth shares

How it works

IWY is a solid mega-cap ETF, holding a portfolio of growth stocks chosen from the 200 largest US companies in the Russell Top 200 Index. Stocks are selected and weighted based on two main growth factors: medium-term growth forecasts and historical sales per share growth. The index follows Russell’s style methodology, which causes IWY to tilt heavier in technology, while comparatively reducing its financials exposure. These sector tilts make IWY somewhat less volatile and thus, appealing to investors looking for a more stable mega-cap growth fund. Notably, instead of replicating the index, the fund uses a representative sampling indexing strategy. The index is reconstituted and rebalanced on an annual basis.

It is quite well spread in terms of sectors but heavily weighted for the usual suspects with Apple and Microsoft accounting for almost 30pc of the fund. I am starting to think of these two technology juggernauts as more like not-so-small countries rather than companies. Imagine if UK plc was half as successful as one of them and why can’t even a Labour government see its main mission as making that happen.

If you flip through the full list of 200 companies in this fund they are an impressive group – a who’s who of America’s most exciting businesses but also with a quality and solidity.

IWY underperforms QQQ

Since 2009 the fund is up 5.6 times, which beats the UK’s FTSE 100’s 116.5pc gain out of sight but is nowhere near as good as QQQ, which is up 12.4 times over the same period, which rather pulls the rug out from under this recommendation. I think we see why QQQ does so much better when we look at how it operates.

QQQ is one of the best established and typically one of the most actively traded ETFs in the world. Often referred to as “the triple Q’s”, it’s also one of the most unusual. The product is one of a few ETFs structured as a unit investment trust. Per the rules of its index, the fund only invests in nonfinancial stocks listed on NASDAQ, and effectively ignores other sectors too, causing it to skew massively away from a broad-based large-cap portfolio. QQQ has huge tech exposure, but it is not a ‘tech fund’ in the pure sense either. The fund’s arcane weighting rules further distance it from anything close to plain vanilla large-cap or pure-play tech coverage. The ETF is much more concentrated in its top holdings and is more volatile than our vanilla large-cap benchmark. Still, the fund has huge name recognition for the underlying index, the NASDAQ-100. In all, QQQ delivers a quirky but wildly popular mash-up of tech, growth and large-cap exposure. The fund and index are rebalanced quarterly and reconstituted annually.

How about a pure tech fund

IYW offers broad exposure to the US technology segment, tracking a diversified, market-cap-weighted index. Cap-weighted exposure in this sector often translates to concentrated positions in tech giants. The index’s weight restraints, primarily, capping individual securities at 22.5pc and capping all issuers individually exceeding 4.5pc to a maximum of 45pc are not unusual and still allow for plenty of single-name impact. The index pulls from a universe covering the top 95pc of the market. The index is reconstituted annually with reviews quarterly. Prior to September 20, 2021, the fund tracked the Dow Jones U.S. Technology Capped Index.

Even IYW (iShares US Technology – all these letters can be confusing) has not done quite as well as QQQ with a gain of 11.8 times since 2009 but it is close. It is a good alternative and has low annual charges.

TECL, the leveraged version of IYW, is forbidden fruit

There is a leveraged alternative to this fund, TECL, which offers an exciting ride but is hard to buy for UK investors because of ridiculous regulations. I have some which I bought before the drawbridge went up so I don’t suppose I will ever sell them.

Why do UK investors have to be protected from buying these ETFs which can be freely traded by everybody in America? It is so patronising, like those long-forgotten days of being told which books we could buy and which films we could watch; though admittedly that may sometimes have had a purpose. As an appalling father I can remember being escorted out of a cinema with my three children, all under twelve, who I am sure would never have slept again after seeing the film I was taking them too. My young son would stand by the door in horrified fascination while watching Tarzan in case it all got too much.

If some pompous bureaucrat came to my home and turned off the TV during some sexy scene with the gorgeous Beth Dutton in Yellowstone though you can imagine how I would react; well, this is just as outrageous and you wonder why I hate bureaucrats.

Share recommendations

IWY (Russell 200 Growth) Buy @ $135

QQQ (quirky tracker of the Nasdaq 100) Buy @ $311

IYW (tracks US technology) Buy @ $89.50

TECL (Direxion Technology 3x Bull). Buy @ $33.5 (if you can)

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