This Canadian tech ETF is a buy, says portfolio manager

Canadian tech stocks have been massive growth vehicles for years now but a recent pullback in the sector may have investors thinking twice before taking the plunge. By the same token, pullbacks present opportunities, and portfolio manager John Hood thinks that could be the case for XIT, the BlackRock Ishares S&P/TSX Capped Info Tech ETF (Ishares S&P/TSX Capped Info Tech Stock Quote, Charts, News, Analysts, Financials TSX:XIT), which has lost about a third of its value in the past half-year.

“I have held XIT twice, once about three or four years ago. And when I saw that Shopify was worth more than Royal Bank, that’s when I decided to sell it,” said Hood, president of JC Hood Investment Counsel, who spoke on BNN Bloomberg on Tuesday.

“Of late, Shopify has dropped by over 50 per cent and I bought XIT actually about three weeks ago, only to see Shopify drop about another ten per cent,” he said.

XIT is in the middle of another down week, with the stock drifting below the $40 mark and currently off about 24 per cent year-to-date. The exchange traded fund, which attempt to mirror the performance of the S&P/ Capped Information Technology Index, had been on a tear over the past few years, rising from about $18 at the start of 2019 to $45 by the end of 2020. Last year was also a success, although muted by the overall downturn in tech stocks, giving XIT a return of 17.5 per cent for 2021.

XIT has $465 million in net assets and has as its top ten holdings (out of 26 in total) familiar names from Canada’s tech industry. A full 30.4 per cent of its weight is in vertical market software consolidator Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU), followed by CGI Inc (CGI Inc Stock Quote, Charts, News, Analysts, Financials TSX:GIB.A) at about 16.8 per cent, Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP) at 13.7 per cent and OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials TSX:OTEX) at 10.9 per cent. Overall, about 56 per cent of its exposure is to businesses in the Application Software space, 18.6 per cent are to IT Consulting, 14 per cent to Internet Services & Infrastructure and 4.7 per cent are to Data Processing & Outsourced Services companies.

The market rotation away from growth stocks and towards value plays coming out of the pandemic can be seen as a factor in the Info Tech Index’s pullback in recent months, with the current rising interest rate environment looming large. Investors seem to be far less interested in expansion stories in the tech field where profitability is still a future prospect. 

At the same time, there appears to be a hair trigger on companies showing signs of slowing growth in these (hopefully) last days of the pandemic and its accompanying economic disruptions. 

Take Shopify, for instance. The stock has been gutted recently with no signs yet of a bottom being hit. The Canadian e-commerce champion came out with fourth quarter earnings last week that were in line with analysts’ forecasts but underwhelmed in terms of guidance for the year ahead, with management pointing to the accelerated growth in e-commerce over the past two years and saying that 2022 will likely see a comparatively less robust pace of growth.

The result was more losses for the stock, which has now lost most of its pandemic-related gains and has shed a massive 60 per cent over its value since its mid-November highs.

Hood said he’s sticking with XIT for the moment but he’s keeping a close eye on Shopify as one of its main components.

“If I’m doing a tactical trade and I see something not going right or going against me, I get the hell out, and so I have certain limits on what I will do,” Hood said. “And the same is on the upside. Once I’ve got my 25 per cent, boom, I’m gone.”

“But on Shopify [stock] I wouldn’t be putting 50 per cent of my portfolio on it, that’s for sure, but based on what I’ve seen and the reaction of Shopify, I’m certainly still holding it. I’m watching it but still holding it,” he said.

The impact of the rotation out of tech has had less impact on Constellation is down about 13 per cent from its late December highs, OpenText is down by about 21 per cent, while CGI is down a smaller six per cent.

The S&P/TSX Capped Information Technology Index itself is down about 32 per cent from its high set in early September and is down about 24 per cent year-to-date.