It hasn’t been tough to outperform the FTSE 100 over the past decade. A spluttering British economy and enduring political turbulence mean the UK’s premier share index has lagged most other major global indices.
Achieving better returns than the S&P 500 index, by comparison, has been much more of a challenge, thanks to the tech sector boom.
Yet several UK-listed exchange-traded funds (ETFs) have managed to trump even the S&P. Let’s take a close look at one of my favourites, and explain why it could be a brilliant buy.
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The outperformer
The ETF in question is the iShares NASDAQ 100 UCITS ETF (LSE:CNDX). This fund invests in scores of non-financial Nasdaq-listed companies (101 as of today, in fact). And so it gives targeted exposure to the booming US tech sector.
In the 12 months to July, the fund delivered an enormous total return of 23.37%. This beat the 21.81% return that the S&P-tracking iShares Core S&P 500 UCITS ETF delivered over the period. And it’s significantly above the iShares Core FTSE 100 UCITS ETF GBP (Acc)‘s 12.81% total return.
The Nasdaq-focused ETF’s performance is even more impressive over a long time horizon too.
Between August 2014 and July 2024, it delivered a total average annualised return of 18.03%. That compares favourably with the 12.78% from iShares’ S&P 500 fund, and the 6.09% return from that other Footsie fund.
Growth levers
So why has the fund performed so strongly? While volatile at times — it delivered a negative return of 32.7% in 2022 — its success reflects how our everyday lives have (and continue to) become increasingly digitalised.
More than 50% of the fund is tied up in information technology goliaths such as Apple, Microsoft and Nvidia. A further 16% or so is invested in communication companies such as Alphabet, Meta and T Mobile. Around 12% is dedicated to consumer discretionary businesses such as Tesla and Amazon.
More specifically, the fund has enabled investors to capitalise on multiple booming tech segments like artificial intelligence (AI), cybersecurity, quantum computing and green technology.
So what next?
A bright outlook for these sectors means the fund could well sustain its outperformance over the long term. Take the AI segment as an example.
Analysts at Statista reckon this will grow 290% worldwide between 2023 and 2028 to be worth a colossal $529bn. We’re merely scratching the surface of AI’s potential capabilities right now, and growth in the coming decades could be beyond our wildest expectations.
But as with any investment, there are risks to building a position in the iShares NASDAQ 100 UCITS ETF. One concern I have is that it carries an expensive price-to-earnings (P/E) ratio of 35.4 times. Such a hefty valuation could prompt a sharp price correction if concerns over Big Tech’s long-term profitability grow.
Having said that, I think the fund could be a good investment to consider as part of a well-diversified investment portfolio. If I didn’t already have tech exposure through the iShares S&P 500 Information Technology Sector UCITS ETF, I’d consider buying this fund for my own portfolio.
