IOO: Exposure To Technology Stocks Is Beneficial (NYSEARCA:IOO)

ETF Overview

iShares Global 100 ETF (NYSEARCA:IOO) owns a portfolio of about 100 large-cap global equities. The fund basically tracks the investment results of the S&P Global 100 Index. With an expense ratio of 0.41%, this fund is not cheap, as many other global equity funds have expense ratios lower than that. For example, Vanguard Total International Stock Index Fund ETF (VXUS) has an expense ratio of only 0.08%. IOO has a higher exposure to the information technology sector than its peers. This means that its fund price will likely benefit from many technological megatrends in the long run. The fund should continue to benefit from an improving global economic outlook. Hence, we think investors should consider owning this fund in the long run.

Fund Analysis

Solid return since October 2022

Let us first look at how IOO performed since 2022. In fact, IOO has done quite well since the cyclical low reached in October 2022. As can be seen from the chart below, the fund has delivered a price return and total return of 55.6% and 59.2%, respectively. In contrast, the S&P 500 index only delivered a total return of 48%.

Is IOO an “international” equity fund?

Let us now look at the geography exposure of IOO. As can be seen from the table below, U.S. stocks represent about 77.9% of IOO’s total portfolio. This is followed by U.K.’s 5.0%, and Switzerland’s 3.4%.

Although U.S. stocks represent nearly 78% of IOO’s total portfolio, we think owning IOO is better than owning a portfolio of global stocks that excludes U.S. equities. The reason is simple. The majority of U.S. stocks in IOO’s portfolio are actually “international” stocks. To be more precise, these companies generate a vast chunk of their revenues and earnings outside of America. For example, Apple (AAPL), IOO’s second-largest holding, generated more than half of its revenue outside of America. IOO’s largest holding, Microsoft (MSFT) also derived a significant chunk of its revenue and earnings internationally. Therefore, we think IOO is a good ETF to own, especially for those who want international diversification.

High exposure to technology stocks

Let us now look at IOO’s sector allocation. As can be seen from the table below, the information technology sector, IOO’s largest sector, represents about 40.5% of its total portfolio.

This higher allocation to the technology sector is crucial as this sector has been growing rapidly in the past few decades. In fact, we believe this is the reason why IOO outperformed its peers in the past. As can be seen from the chart below, IOO delivered a total return of 194.8% in the past 10 years. This was much better than the 54.2% return of VXUS and the 55.3% return of Vanguard FTSE All-World ex-US Index Fund ETF (VEU). The information technology sector only represents about 13.1% of VXUS and VEU’s portfolio each.

Looking forward, we think having a high exposure to the information technology sector is quite beneficial. This is because this sector will continue to benefit from several important technological megatrends such as cloud computing, artificial intelligence, Internet of Things, autonomous vehicle, industrial automation, AR/VR, etc. These megatrends will act as tailwinds to technology stocks in IOO’s portfolio, at least in the next few years.

Improving global economic outlook

Now, let us look at two economic indicators to gauge the outlook of the global economy. The first indicator we will check is the global composite PMI. For reader’s information, PMI is a forward economic indicator that helps us to gauge the strength of the economy. A value higher than 50 usually means the economy is heading towards expansion, and a value below 50 means the economy may be heading towards contraction. As the chart below shows, the global composite PMI has been improving for 5 consecutive months since the low reached in October 2023. It is currently at about 52.28 in March 2024.

Another indicator we will show to readers is the world manufacturing cycle index. This is not a forward indicator, but simply an indicator of where the world’s manufacturing cycle is at. A value above 0 usually means that manufacturing activities are improving, and a value below 0 means that manufacturing activities are cooling down. As can be seen from the chart, this index has finally reached above 0 in April 2024. This index has been below 0 for the past 2 years. A value above 0 is a clear indication that the global inventory correction is likely over and manufacturing activities are now finally heating up. The global economy may be entering a new cycle of expansion.

Both the global composite PMI and world manufacturing cycle index are telling us that the global economic outlook will likely continue to improve for the rest of 2024. This will likely act as a tailwind to IOO’s fund price in the upcoming few months.

Currency risk is one that needs to be considered

One risk investor needs to consider is currency risk, as non U.S. stocks still represent about 21% of IOO’s portfolio. As can be seen from the chart below, IOO’s fund price has an inverse correlation to the strength of the U.S. dollar. As the U.S. dollar strengthens, IOO’s fund price tend to fall and vice versa. For example, during much of 2022, IOO’s fund price declined due to the strength of the U.S. dollar.

Investor Takeaway

We like IOO and its portfolio of “international” stocks. Its higher exposure to technology stocks means that it should outperform its peers that also focus on international stocks. The fund should continue to perform well thanks to an improving global economic outlook. Therefore, we recommend investors owning this fund in the long run.