‘Exponential technologies’ subsector drawing investor interest

Have you ever wished you were an early investor in Apple or Amazon or some other well-known tech name that has shown enormous growth in shareholder value since its inception?

A relatively new investment area known as “exponential technologies” is drawing a lot of investor interest. While some individual companies in this area have had rapid growth in their share prices, the good news is that the overall sector does not look like it has sky-high valuations. Nor have early returns for subsector ETFs been prohibitively strong, still leaving growth for new investors.

Deloitte Consulting says, “Exponential technologies … evidence a renaissance of innovation, invention, and discovery. Such breakthroughs—innovations progressing at a pace with or exceeding Moore’s Law—have the potential to positively affect billions of lives.”

The area is also known by some as “disruptive technologies” and includes technologies such as artificial intelligence (AI), robotics, cloud and quantum computing, blockchain (behind crypto-currencies), “big data” science, drone technology, virtual and augmented reality, alternative energy systems, digital biology and biotech, digital medicine, additive manufacturing (including 3D technologies), autonomous vehicles, fintech, nanotechnology, and other fast-growing disciplines.

According to Singularity University,

“Exponential technologies are those which are rapidly accelerating and shaping major industries and all aspects of our lives. … We believe that the solutions to the world’s most pressing challenges lie at the intersection of these exponential technologies. That is, when two or more of these technologies are used in combination to attack a persistent challenge, the possibility of developing a sustainable solution becomes much more likely. For a technology to be ‘exponential,’ the power and/or speed doubles each year, and/or the cost drops by half.”

In September 2018, Barron’s commented on the “unprecedented overhaul by S&P and MSCI of their Global Industry Classification System, or GICS, a widely used taxonomy that carves up the stock market into sectors, industry groups, industries, and subindustries.” As part of this reorganization of sectors, it is becoming a little more difficult to find “pure” evolving technology investments in broad tech-related ETFs. New ETFs have been developed to capture new technology trends.

Barron’s noted,

“BlackRock’s iShares is pushing the envelope with its ‘evolved’ ETFs, covering tech and six other industries, including funds such as iShares Evolved US Innovative Healthcare (IEIH) and iShares Evolved US Media & Entertainment (IEME). “Technically, these are sector ETFs, but they don’t look anything like GICS-based sector funds. Stocks overlap in different sectors, reflecting their multifaceted businesses, and BlackRock says that sector constituents will change more frequently than traditional classifications to capture evolving business trends. Similarly, iShares Exponential Technologies (XT) crosses sector boundaries to find innovative companies involved in Big Data and robotics; a third of the fund is in tech, another third in health care, and the rest in other sectors.”

The Morningstar Exponential Technologies Index was established in 2014 and its broad objectives are described on its website:

“The Morningstar Exponential Technologies Index … redefines technology indexing in several key ways. First, the index is not narrowly confined to companies classified as technology-related on sectoral or industry lines. It recognizes that companies benefitting from innovation can be found across the economy, including in sectors like industrials and financial services. Second, the index identifies innovations poised for nonlinear, or exponential, growth, then works backward to select companies positioned to benefit—as producers, users, or suppliers. Third, the index is unconstrained by geography, including innovators across the globe.”

The trend for Morningstar’s Index has been strong, though somewhat volatile, with performance of its tracking fund returning about 19% annualized over the past three years. The iShares Exponential Technologies ETF (XT), which launched in 2015, has returned about 11.6% annualized over the past three years and has a P/E ratio of 19.3.

TREND FOR MORNINGSTAR EXPONENTIAL TECHNOLOGIES INDEX

Source: Morningstar

‘Exponential technologies’ subsector drawing investor interest

Helping clients get the most value for their retirement dollars

Active vs. passive: Is it for real?

Two very different outlooks for the S&P 500—Could both be right?

Cultivating new clients via 401(k) managed accounts