Volatility in tech sector highlights need for more hedging tools

March 23, 2021 09:00
Photo: Bloomberg

With the acceleration of transforming into a digital economy, several markets have seen upbeat earnings forecast of tech companies driving stock prices to new highs in the beginning of 2021. The progress of digitalization opens up enormous business opportunities for US tech giants, which have accounted for a substantial part of the gains last year in both the tech-laden NASDAQ and S&P 500, resulting in the outperformance of information technology over other major sectors including health care, consumer discretionary, and financials.

Across the Pacific, another tech-heavy index benchmarking the market deeply intertwined with US tech industries - Taiwan Stock Exchange Weighted Index (TAIEX) – has similarly set new highs since the start of this year. Accounting for 60% of the global market share in contract chip production, Taiwan’s semiconductor manufacturing industry is a key driver behind the performance.

With a cutting-edge industry identified as a critical supply chain in a recent US Executive Order, Taiwan’s economy and that of the US are growing increasingly closer, particularly as the US seeks to develop advanced technologies at home amid a global chip shortage. In the meantime, two other major Asian indices that also have significant tech sector weightings - Korea’s KOSPI and Japan’s Nikkei 225 - traded at new highs as well, while Hong Kong tried to catch up with the launch of its tech index. Cognizance of the global tech value chain, technical expertise and the ability to navigate the critical bottlenecks in advanced manufacturing have now become prerequisites for sound investing.

The surge of popularity in tech stocks, coupled with the global phenomenon of increased retail participation as a result of rapid adoption of digital technologies driven by the pandemic, led to a series of splits of tech stocks last year, such as Apple and Tesla, aiming at lowering entry prices to expand retail engagement and liquidity. In addition to stock splits, certain efforts were also made by exchanges and market intermediaries to remove entry barrier and to capture the influx of this segment. For example, several online brokers - Robinhood and Interactive Brokers, among others - have introduced fractional share trading, which allows investors with limited resources to trade high-priced tech stocks such as Amazon and Alphabet, providing more flexibility and investment opportunities.

The demands for trading tech stocks, along with the outlook of the tech sector, also heighten investors’ need for hedging investments in the volatile tech industry.

On the derivatives exchanges’ side, products featuring smaller notional values and higher precision for managing tech industry risks, have been launched in recent years - CME’s Micro E-mini Nasdaq-100 futures and options, ICE’s Micro NYSE Fang+ index futures, and Taiwan Futures Exchange’s launch of a wider suite of mini single stock futures focusing on tech stocks, such as Taiwan Semiconductor Manufacturing Co., Ltd.

These products offer participants more granularity in trading strategies, and by making risk management tools more accessible for both big and small investors, derivatives exchanges enable healthy market development while promoting inclusiveness for various investment communities.

The constantly evolving nature of the tech industry, combined with the ripple effect caused by worsening chip shortage worldwide, will likely create an additional level of uncertainty for markets in an era of digitalization. As market participants require more efficient and accessible instruments for managing risks in the tech sector, small-sized derivatives products, such as mini single stock futures on tech stocks, may provide useful hedging alternatives for investors.

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Chairman of Taifex