I believe that the two exchange-traded funds (ETFs) in this article have strong long term potential and would be solid picks in April 2021.
Growth ETFs
Over time, I think that it’s the businesses changing the world that will deliver the greatest returns to shareholders for the foreseeable future.
That’s why I really like these two ideas:
Betashares Cloud Computing ETF (ASX: CLDD)
You might be able to guess that this ETF is about cloud computing. There has already been a seismic shift to cloud computing in some form over the past year in the face of COVID-19. Microsoft talked of years of cloud demand being brought forward into the space of a few months.
I think the world was going to steadily change over time to cloud computing, but it’s happening much faster and now businesses really see the power of it.
BetaShares says that cloud computing has been one of the strongest-growing segments of the technology sector, and given much of the world’s digital data and software applications are still maintained outside the cloud, continued strong growth has been forecast.
To make it into this portfolio, a business must generate a certain amount of revenue from its cloud operations. The more cloud revenue, the bigger exposure the ETF gives to that business.
These are some of the biggest positions in the portfolio right now: Dropbox, Proofpoint, Zscaler, Workday, Xero Limited (ASX: XRO), Twilio, Shopify, Netflix, Paycom Software and Akamai Technologies. There are only 36 positions in total, so it’s a fairly concentrated investment. It does give a small amount of exposure to names like Alphabet, Alibaba, Amazon and Microsoft.
Whilst the annual management fee cost of 0.67% per year is high for an ETF, the returns of the index it tracks have been incredibly strong in recent years. Over the last five years the index has returned an average of 38.75% per annum. But who knows what the next five will look like, particularly if interest rates rise?
VanEck Vectors Video Gaming and eSports ETF (ASX: ESPO)
Another area of the economy that keeps growing strongly is the video gaming and e-sports industry. COVID-19 certainly accelerated this trend. There is still high demand for video gaming – for example, it’s been difficult just to get your hands on a PS5.
The shares in the portfolio make a large amount of their money from video gaming and e-sports such as Tencent, NVIDIA, Bilibili, Sea, Advanced Micro Devices, Nintendo, Activision Blizzard, Netease, Nexon and NCSoft.
It’s a pretty diversified ETF. Whilst there are only 25 names inside the portfolio, there are several countries with a weighting of more than 5%: the US (35.6%), China (23.2%), Japan (19.5%), Singapore (7.1%) and South Korea (5.5%).
I think that this ETF has a strong future ahead. The returns of the index that this ETF follows has also been very strong – over the last five years it has averaged 39.2% per annum.
Summary thoughts
I certainly wouldn’t expect returns of more than 30% per annum to continue, but there’s a good chance that both ETFs are able to deliver market-beating returns over time because of the level of underlying growth that they’re experiencing. The world isn’t likely to become less technological.
You can click on this link to ASX growth shares and find lots of ASX stock ideas and analysis.
