Strategy

5 Reasons Why Technology Reigns Over the Market

Nov. 27, 2023

Snapshot

The BMO Covered Call Technology ETF (ticker: ZWT) has been a strong performer through 2023, outperforming the tech-heavy Nasdaq-100 Index, as well as competitor funds. This performance can be attributed to being overweight larger cap technology companies such as Alphabet, Microsoft and Nvidia, as well as being disciplined on our option writing strategy.

Ticker

Name

1M

3M

6M

YTD

1Y

SI
(01/26/2021)

ZWT CN EQUITY

BMO COVERED
CALL TECHNOLOGY

1.92%

-1.23%

18.07%

47.60%

45.60%

8.62%

XNDXCAD INDEX

NASDAQ 100 TR CAD

0.59%

-3.34%

11.81%

35.87%

29.71%

6.60%

Added Value

1.33%

2.11%

6.26%

11.73%

15.89%

2.02%

Returns as of October 31, 2023. 1-year and above returns are annualized. Total net returns. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results. The Nasdaq 100 Index sector composition differs widely from ZWT and is simply used as a benchmark for comparison purposes due to its heavy technology equity exposure. The differences in sector composition of ZWT versus Nasdaq 100 have contributed to its outperformance. 


ETF

Benefits

  • Invests in leading North American large-cap tech and tech-related companies
  • Uses call option writing to generate steady income and reduce volatility
  • Capitalizes on several emerging opportunities, including generative AI, cloud computing and semiconductor growth


5 Key Themes Driving Returns

We have seen impressive overall market performance in 2023, with strong returns that have been primarily driven by the technology sector. The S&P 500 is up 22.18% in Canadian-dollar terms, while the Nasdaq is up 49.53%.1 This year started on a positive note, with surprisingly robust market performance across various sectors, however, it was the technology component that has emerged as the clear frontrunner. 

A handful of themes are driving results:

1. Semiconductor Growth Propelled by AI:

  • AI has become an immense focus, as technology companies race to invest heavily in research and development in a bid to revolutionize how businesses operate. It is not just a buzzword — it is a reality. Generative AI is becoming part of a multitude of industries, from music to manufacturing. We have already seen certain companies capitalize on AI’s potential. Furthermore, as more companies and industries incorporate artificial intelligence into their processes, we anticipate we may see productivity growth driving higher margins.
  • Projections indicate an upward surge in semiconductor demand owing to the pervasive influence of AI. Forecasts suggest profit growth will be impressive in 2024, with this momentum carrying into 2025. This anticipation signifies a buoyant outlook for the global semiconductor domain, driven by sustained AI training and inference needs.


Semiconductor Market Size, 2022 to 2032 (USD Billion)

Semiconductor Market Size, 2022 to 2032 (USD Billion)
Source: precisionresearch.com.

2. Technology Cost-Effective Transformation:

  • Over the past year, technology companies have undertaken a remarkable transformation by focusing on cost efficiency. This strategic retrenchment and cost-cutting approach has not only improved margins but has also set the stage for higher earnings expectations. We’ve seen markets reward companies that focused on efficiency this year.


Number of Tech Employees Let Go, as of November 232023

Number of Tech Employees Let Go, As of November 23, 2023
Source: trueup.io/layoffs.
All logos and trademarks of other companies are the property of those respective companies.

3. Earnings:

  • A majority of S&P 500 companies have reported Q3 results, and despite lingering recession fears, earnings have actually shifted up — the first quarter since last year in which earnings have turned positive. In fact, the S&P 500 is set to notch its first quarter of earnings growth in a year (estimated at nearly 5%).
  • Earnings were strong once more for the technology sector led not surprisingly by the so-called Magnificent 7.
  • Just to highlight a few of them:
    • We saw Microsoft deliver better-than-expected earnings, and show that the software company is strongly positioned in the cloud and AI races. A foothold in cloud infrastructure, coupled with its close relationship with OpenAI, puts Microsoft in a strong position to capitalize on rising generative-AI demand. 
    • Alphabet also provided strong top-line results. The main ad business had a strong quarter (both search and YouTube advertising saw double-digit growth), but cloud revenue missed. As Google’s dominant search business matures, investors are looking to the cloud unit to take the lead on growth. 
    • Similar story at Meta Platforms, which beat revenue estimates and indicated growth remains brisk. Cost-cutting, retooling its ad businesses and limits on new spending outside areas seen as more solid bets (AI, augmented reality) will remain Meta’s focus. We did see digital ad market show signs of recovery based on the earning results, as well.

4. Cybersecurity and Cloud Computing: 

  • With increased reliance on digital services, cybersecurity and data privacy are becoming of huge importance. Furthermore, regulations around privacy protection have further fueled investments in this sub-sector. 
  • Cloud computing continue to solidify its position as a fundamental pillar in the technology sector offering scalable infrastructure, storage, and other capabilities.


Global Cyber Security Market: Size by Component 2022
2032 (USD Billion)

Global Cyber Security Market: Size by Component 2022–2032 (USD Billion)
Source: market.us.

Global Cloud Computing Market: Size by Service 20222032 (USD Billion)

Global Cloud Computing Market: Size by Service 2022–2032 (USD Billion)
Source: market.us.

5. Emphasis on Quality:

  • The U.S. technology sector has a lot of quality companies with strong fundamentals and balance sheets. These companies typically have high return on equity (ROE), stable earnings across changing business cycles, and strong balance sheets. Furthermore, some of the technology companies might even be considered consumer staples given their strong recurring revenue and stable cash flows.


Outlook

In essence, considering these pivotal elements, maintaining or strategically enhancing investments within the technology sector — particularly in software, AI-centric firms, and semiconductor entities — seems prudent for fostering portfolio growth and maximizing potential returns. The BMO Covered Call Technology ETF (ticker: ZWT) has been one of the top performing BMO ETFs this year, up 63.30%.

In addition to the exposure to technology, the covered call overlay helps turn volatility into additional income. The emphasis on having high quality, large-cap technology names has enhanced the overall stability and risk profile of the ETF, whilst still providing an attractive yield boost relative to the technology index.

1 As at November 232023.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

The communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

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