It has become something of a cliché, but technology really is changing the way we live and work. On buses and trains, for example, half of the passengers are likely glued to smartphones or tablets. Technological developments are certainly not confined to telecommunications; in fact, new technologies are heralding enormous changes in a very wide range of industries globally. And, in some cases, technological advances are creating entirely new industries whose participants are enjoying stellar growth rates.
Technology has been a major source of global growth in recent years. Since 1995, earnings across the technology sector have increased more than 500 per cent, nearly double the wider market. This translates into an annual compounded growth rate of 8.5 per cent a year compared to 5 per cent for the market. In 2017, technology was clearly the top-performing sector, averaging a total return of close to 40 per cent on a market-capitalisation-weighted basis, according to Bloomberg. While mega-caps such as Apple, Google, Facebook and Amazon dominate, there is innovation and value to be found across the sector. From artificial intelligence (AI) to cybersecurity, e-commerce and cloud infrastructure technology firms are growing and diversifying in many different directions.
Technology-driven advances and the pace of innovation are the defining megatrend of our era. Developments in fields such as robotics and automation are changing many industries and are having an impact on the way we work and live.
Companies are increasingly investing in automation as they seek to improve productivity; reducing production costs and, in turn, increasing profitability. Already generating more than $200 billion annually, sales in the robotics and automation sectors are tipped to increase more than fivefold over the next decade, according to Business Insider Intelligence’s “Cyber Security Report” from April 2016.
Currently, more than two-thirds of industrial robots are employed in the automotive, electronics and metal industries, according to the International Federation of Robotics, but their use is likely to become more widespread as AI systems develop further. Improvements in image and voice recognition, for example, as well as increasing usability of machine vision technology, will enable robots to perform ever-more complex tasks, widening their application and seeing them penetrate other industries.
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These powerful trends are interesting from an investment perspective. After all, the premise of equity investing suggests investors allocate capital towards companies that can generate and maintain strong growth rates, which are most likely to generate favourable long-term returns for shareholders. This philosophy is a hallmark of thematic investing, whereby investors seek to benefit from exposure to a particular trend or theme. Thematic funds can be additionally appealing to investors as their performance is often uncorrelated with economic cycles and other forces that drive mainstream equity and bond markets.
Accessing pioneering companies with the greatest growth potential can be easier said than done. Small and mid-cap companies at the cutting edge of innovation in emerging industry sectors are typically not well represented in traditional market-cap-weighted indices. Constituents of the S&P/ASX 200 Index, for example, are more mature large-cap companies, often with more modest growth rates. Accordingly, investors might be missing out on some of the brightest current investment opportunities, even if their portfolio is heavily weighted towards equities.
Similarly, investors who focus primarily on the domestic market in Australia are not only missing out on the benefits of international diversification, but are likely to also be overweight sectors such as financials and materials. Significantly, they are also likely to be very underweight sectors such as information technology and healthcare, which are major sources of growth and innovation.
One of the best ways to add such exposures to a portfolio while simultaneously reducing ‘single-stock’ risk (the risk of selecting one company that loses significant value) is through exchange-traded funds (ETF). There are several ETF solutions for investors to ensure they have exposure to such trends.
For broad technology there is the ETFS Morningstar Global Technology ETF (ASX code: TECH) from ETF Securities. In designing TECH, ETF Securities partnered with Morningstar, whose expertise as a leader in equity research provides insight used to identify the leading technology companies across the globe, based on rigorous analysis of the strength and sustainability of their competitive advantages. Furthermore, Morningstar’s valuation models ensure only firms trading at attractive valuations relative to peers are selected for the fund. Additionally, there is the BetaShares Nasdaq 100 ETF (NDQ). This is different to TECH in that it focuses on United States-listed stocks and has only a 60 per cent weighting to technology. However, it remains another good technology proxy.
For more specific technology exposures, which give access to defined sub-themes, there is the ETFS Robo Global Robotics and Automation ETF (ASX code: ROBO). For ROBO, ETF Securities has partnered with Robo Global, a pioneer in robotics and automation investing and the developer of the benchmark industry classification system for the sector. Robo Global’s expertise lies in its ability to identify companies that are best placed to benefit from the structural changes underway and have competitive advantages that are likely to persist through time. Additionally, there is the BetaShares Global Cybersecurity ETF (HACK), which gives investors exposure to companies at the forefront of cybersecurity.
In summary, technology is one of the key trends of our day and age and there are now ways to invest in this in its pure form at both a broad level and also with more specific themes such as robotics/AI or cybersecurity.
