It’s time for me to update the mantra I have used here for many years.
No, I haven’t backed off my belief that the road to wealth is paved with tech.
Just the opposite in fact. What’s really going on these days is that the road to wealth is becoming a super highway.
Let me explain. As I have noted many times in our twice-weekly chats, U.S. tech firms generate enormous amounts of cash.
That’s one of the reasons why the top four American tech firms have combined market caps of $3.6 trillion, or roughly the size of Canada’s and Brazil’s economies combined.
Indeed, their profit margins are so huge they simply can’t invest it all in the next round of innovation.
And it explains why tech firms are the leaders in the one of market’s more important new dynamics – share buybacks.
Don’t underestimate the importance of this red-hot new trend. Just in the first quarter, we’re talking at least $126 billion of tech share purchases.
Why Buybacks Are Like Dividends
Now then, there’s a strong element of irony in our chat today.
See, it wasn’t all that long ago that I was pretty down on tech companies that paid dividends. That usually meant the firm’s execs had pretty much run out of fresh ideas, and rather than invest in R&D, they just mailed checks to their investors.
But in the modern digital economy driven my mobile apps and the cloud, tech leaders have insane operating margins. That’s the profit a company makes on every dollar of sales, after taking out variable costs like wages.
As just one example, Facebook Inc. (Nasdaq:FB) has operating margins of more than 38%.
In my view, buybacks are basically another type of dividend. By taking shares off the market, tech firms boost their share prices, adding to overall shareholder returns.
Make no mistake. Buybacks are huge.
New data from the S&P Dow Jones Indices shows that we’re talking a minimum of $188 billion – in the first quarter. The period ranks as the second-highest amount on record, based on data going back to 1998.
Tech Buys Back Bigtime
Of the top 10 buyback leaders, six were in high tech or the life sciences, buying back more than $126 billion.
In other words, as I have been saying here for years, it’s tech-related firms that keep driving the markets to new heights.
This crucial fact is one of the reasons why I continue to recommend the iShares Expanded Tech Sector ETF (NYSE:IGM). Many of its portfolio holdings are involved in buybacks.
Holding 288 stocks, this exchange-traded-fund covers the waterfront of great tech companies in such fields as satellite communications, the Internet of Everything, cloud computing, e-commerce, chips, robotics, artificial intelligence (AI) and 3D printing – just to name a few.
As you might expect, this robust ETF owns some of the leading names in tech today that have helped the stock market bring investors historic gains in the 10-year bull market.
Now, before I show you what’s inside this EFT, I want to draw your attention to a disturbing find of auditors looking in to folks’ Social Security payments. Turns out, the U.S. Inspector General’s office found extraordinary errors in the processing and payment of Social Security checks… over the last 33 years.
Most victims have no idea they could be owed money – as much as $23,441, according to our estimates.
What’s Under the Hood
But there’s more here than just playing Apple and Amazon.com Inc. (Nasdsaq:AMZN). Take a look:
- Shopify Inc. (NYSE:SHOP) is a terrific play on the boom in e-commerce that shows little signs of slowing down. This firm is a backend play I like to call Amazon’s Super Charger. It enables third-party vendors to have a presence on Amazon’s website and offer other tools. Shopify hosts software in the cloud that merchants use to run their businesses across all of their sales channels. These include web and mobile storefronts, physical retail locations, social media storefronts and marketplaces.
- ServiceNow Inc. (NYSE:NOW) is making a fortune by allowing clients to outsource their IT services. More than 800 members of the Forbes Global 2000 firms use ServiceNow products. A decade ago, the market for IT services delivered via cloud platforms barely existed. But it’s now forecast to be worth at least $127 billion. CEO John Donahoe formerly ran both eBAY Inc. (Nasdaq:EBAY) and PayPal Holdings Inc. (Nasdaq:PYPL).
- Adobe Inc. (Nasdaq:ADBE) has made one of the more stunning movements from desktop publishing to cloud sales. Its Creative Cloud platform now offers far more than just Illustrator for creating, editing and managing graphics and Photoshop for managing and editing pictures. The firm says its total addressable market will be $80 billion at the end of 2020. Not bad for a firm that only got involved in digital content back in 2009.
- RealPage Inc. (Nasdaq:RP) provides on-demand software for rental property managers and owners, and is a great play on the global real-estate market. The Texas-based firm RealPage serves more than 12,400 clients worldwide from offices in the U.S., Europe and Asia. Talk about scale – it helps manage rental properties with more than 30 million residents with a platform that processes more than 600 billion transactions yearly.
A Market Crusher
This is a very cost-effective way to play the tech boom in a way that gives us broad diversification, but that is focused on American firms that are the key drivers of innovation today.
IGM has a cost-ratio of just 0.48% and trades at roughly $210.
For that price, you get market crushing performance. Since the market bounced back last Dec. 24, IGM has beaten the S&P 500 by 21.5%.
The results over the long haul are simply stunning. In the past five years, IGM has beaten the broad market by 161%.
Let me translate that for you. Had you put $10,000 into a broad market ETF, you’d have $15,180 today.
But that same money invested in IGM would be worth $23,300. That’s $8,000 extra for taking on no real additional risk.
In other words, this is a great way to really amp up your net worth.
I hope you won’t be looking back on this conversation five years from now and wishing you had driven this hot rod down the road to wealth.
Cheers and good investing,