By Nasdaq Global Information Services
Today is a phenomenal time to be alive. Why? Because how we live, work, and play is changing at an almost unimaginable speed—and it’s nearly all due to advancements in technology. By far the most the most tangible examples of the today’s technology revolution are innovations that have become integrated into our daily lives. Facebook and Twitter have given the concept of “social” a whole new meaning. In our homes, Alexa is everyone’s favorite in-home personal assistant, Nest controls our thermostats and appliances, and smart refrigerators can now automatically reorder groceries when we run low on milk and eggs. We’re living in a new technology ecosystem that helps us manage our lives, online, 24/7. Even so, where technology is having the most impact is not in our personal lives, but in industry. From how we buy and receive goods, to how we drive, to how we manage and receive healthcare, technology is innovating industry around the globe.
For investors, this shift presents an unprecedented opportunity. The time is now to explore the industries and companies that are poised to profit from today’s technology revolution—and to create a 21st century portfolio designed to reap the benefits.
Semiconductors & Storage: Technology’s Predominant Drivers
While certainly not as exciting to talk about as drones and self-driving cars, semiconductors and data storage are the true underpinnings of every technology innovation we’re seeing today. The ability to process and store data and build out augmented products and goods and services all goes back to the massive improvements in semiconductor chips over the past 10 to 15 years. These chips are the key to storing and processing the massive amounts of Big Data that fuel our new, technology-driven world.
Consider the recent disruption of the retail industry. Amazon has changed the game in the retail space, and that success is largely due to Amazon’s ability to seamlessly stock and deliver goods. It’s a feat that is only possible with the help of Big Data. Big Data is used to track order frequency and predict trends—which is why you’ll get an email from Amazon reminding you that you’re low on diapers at the precise moment you are low on diapers! Big Data is used to “teach” the huge fleet of robots in Amazon’s warehouses how to pick and pack goods to get orders delivered to customers’ doorsteps in record time. Eventually, Big Data will be the fuel behind Amazon’s drones (which, according to recent news, will even respond to customers waving at them from the ground). And while Amazon may be the most obvious example, this level of innovation and depth of disruption is taking place in every industry today, in every geography around the globe.
From an investment perspective, this means that creating the 21st century portfolio requires looking beyond traditional market sectors of financials, healthcare, oil and gas, basic materials, and even traditional technologies. The key to investor success in the coming decades lies in one place: emerging technology and the companies that are disrupting the world as we know it.
What are these emerging technologies? Cloud as a platform. Artificial intelligence (AI) and robotics. Big Data. Financial and payment technologies like cryptocurrencies and blockchain. No longer niche investments, each of these technologies has grown to become fully rooted within the broader industries they serve. That means that as the economy grows on a global scale, it is these emerging technologies and the companies that provide them that will dominate the global economy. These are the technologies that are driving the future.
An index designed to track the gains of disruptive technology. There’s another way to describe the emerging technologies that have forever changed the way we live, drive, buy goods, talk to friends, do business and much, much more—and that’s “disruption.” The greatest and most notable advances made in recent times have been powered in large part by disruptive technologies and the companies behind them ready to upset the status quo and forge new normals, whether that old way of doing things was trying to hail a speeding cab with a whistle or writing mental IOUs to friends after a night out. Today, all you have to do to get an on-demand ride or pay a friend is take out your smartphone and open an app. A decade ago sleek flip phones were seemingly all the rage, and now the world is held in your pocket.
This is the overall story of disruptive technology, as concepts like robotics, artificial intelligence, data and mobile have revolutionized every corner of life—and along the way, driven incredible economic gains. These disruptive technologies and the organizations that develop, deliver or otherwise use them represent the most potent market both now and in the future. When constructing a portfolio to fit the 21st century, investors can reference the newly established Nasdaq Yewno Disruptive Technology Benchmark (NYDTB) Index as a measure of the securities and themes most emblematic of the technology revolution and growth.
Because disruptors hail from all different industries, Nasdaq and Yewno recently partnered to launch an index investors can use to track the performance of companies engaged in disruption across a number of themes. Developed through a benchmark approach, the NYDTB tracks businesses in Artificial Intelligence, Robotics, Automotive Innovation, Healthcare Innovation, New Energy & Environment, Internet of Things, and Data Computing & Processing—which further break down into 35 distinct subthemes including: cyber security, blockchain, digital currencies, autonomous and electric vehicles, bioinformatics, Internet of Things, mobile payments, wearable technology, lithium batteries, 3D printing, drones, spacecraft and satellites and more. These subthemes are the very underpinnings of disruption, of the ongoing revolution that’s being carried out and which investors should be most interested in.
Reflecting the positive potential for disruptive technology, the NYDTB is in part created by using an AI-augmented approach to scour over 2 million approved patents from over 120 countries in fractions of the time it would normally take humans. The system evaluates and graphs that patent data against factors like linguistic similarity to the 35 emerging technology subthemes, which is the basis for classification. Patents indicate intellectual property and investment in research and development, meaning the Index selects companies that are likely to be true drivers of future innovation and growth in their space.
The 1,240-component Index is constructed by Yewno compiling a universe of securities and then scoring companies based on their number of patents linked with an identified theme as a share of all the company patents (pure score), as well as their number of patents in a subtheme relative to all patents from all companies (contribution score). Nasdaq then scrubs the list according to eligibility criteria, and the result is a diverse yet focused index that represents broad swaths of technology from all sectors and levels of market capitalization. Not only are the biggest players represented, but so too are the publically listed startups pushing the boundaries of innovation, the ones who further light a fire underneath those titans and which push forward progress for all, the next unicorns.
There is no way to build a 21st century portfolio without technology exposure. Certainly, this sentiment holds true even now, but these disruptive technologies are the crux of investment strategy and will only further be entrenched as such. And now, with the NYDTB as a reference, investors can navigate the water of disruption.
The ‘hype’ of emerging technologies
In late 2017, Gartner published a chart titled ‘The Hype Cycle of Emerging Technologies.’ It included all of the usual suspects, including smart robots, quantum computing, autonomous vehicles, and virtual reality. The list was long, and the predictions followed an old-school technology lifecycle, moving through phases such as Innovation Trigger, Peak of Inflated Expectations, Trough of Disillusionment, Slope of Expectations, and Plateau of Productivity. It’s an interesting perspective. Not because of the technologies themselves, but because of the use of the word ‘hype.’ It begs the questions: what does ‘hype’ really mean? In this case, all of the technologies listed in the chart are real. These aren’t fly-by-night startups, but profitable companies who are delivering real products and services and who are generating very real earnings. It’s no wonder BusinessWire has projected that the global smart robot industry will reach $14.3B by 2023, more than tripling from its $4.9B valuation in 2018 by growing at a CAGR of 28.78% over this five-year time period.
Now is the time to invest in the Fourth Industrial Revolution. From the invention of the steam engine and the birth of the factory during the first industrial revolution to the use of electricity applied to mass production to the digital revolution, the Fourth Industrial Revolution is characterized by a “range of new technologies that are fusing the physical, digital and biological worlds impacting all disciplines, economies and industries, and even challenging ideas about what it means to be human” according to Klaus Schwab, founder of the World Economic Forum (WEF), in his book The Fourth Industrial Revolution.
According to Schwab, the Fourth Industrial Revolution is different from the three previous ones for three key reasons: velocity, scope, and systems impact. He also sees intelligent robots as “the epicenter of the Fourth Industrial Revolution.” This interconnected map by the WEF shows how AI and robotics stems from the Fourth Industrial Revolution and impacts a vast array of concepts and industries across nearly every industry sector:
This massive revolution is being driven by a variety of technological breakthroughs that are enabling dramatic growth in all areas of AI and robotics. Cloud computing and the availability of public data are growing rapidly. Intense growth in Big Data is fueling AI, giving robots the power to analyze information of every kind to make strategic, intelligent decisions. The International Data Corporation predicts that the amount of data in the world will grow ten times by 2025 to 163 zettabytes from the 16.1ZB of data generated in 20168. At the same time, robots are becoming much more sophisticated. Intelligent surgical devices are transforming healthcare as we know it. Drones are being applied for everything from military operations to entertainment. And machine learning allows smart robots to share vast amounts of information very quickly, giving them the ability to share learned information and adapt their skills instantly. The impact of AI and robotics is truly a revolution, which makes it one of the most important investment opportunities of our time.
Investors can now gain access to the global Artificial Intelligence and Robotics space through the First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT). This AI and robotics-focused ETF tracks the Nasdaq CTA Artificial Intelligence & Robotics Index (NQROBO) to help investors gain targeted and robust exposure to AI and robotics companies in the industries that are driving the area’s greatest growth, while ensuring investability, adequate liquidity, and size. Already, AI and Robotics are identified as cornerstones of disruptive technology (seen in the NYDTB), and thus demand attention from investors.
The top 30 or more securities within each of the three categories—Enablers, Engagers, and Enhancers—are selected for a total of 90 or more securities in the Index at the time of the semi-annual evaluations utilizing CTA’s AI/Robotics Intensity Rating. This rating is designed to capture the perceived degree of a company’s AI/Robotics sector involvement within each respective category, and employs a modified equal weighting methodology to achieve an optimal mix of Enablers (25%), Engagers (60%), and Enhancers (15%). This strategy is designed to take advantage of Engagers—companies that receive a large portion of their revenues directly from the development, integration, and delivery of AI and robotics products.
The growth of the companies in the Nasdaq CTA Artificial Intelligence & Robotics Index from a total return standpoint (NQROBOT) is remarkable. Though the live Index officially launched on December 18, 2017, NQROBOT has outperformed the S&P 500 TR Index by more than 1000% since its first day of back-tested history in September 2001 through the end of February 2018.
This impressive performance is driven by the Index’s robust exposure to the global AI and robotics market and spanning the industries that are driving the greatest growth, including technology, industrials, healthcare, and consumer products. Again, this is not technology ‘hype.’ The companies in the Nasdaq CTA Artificial Intelligence & Robotics Index are delivering real products and services and generating very real returns for investors today.
Blockchain is also affecting nearly every sector of the economy. Blockchain is among the latest technologies to carry the banner for disruption and is also an integral subtheme identified by Yewno and Nasdaq in the Nasdaq Yewno Disruptive Technology Benchmark. While many investors may be familiar with the term, very few understand exactly what it is, much less how to invest in it. The first thing that is important to understand is that blockchain is not the same thing as crytocurrency or bitcoin. There’s a lot of confusion out there on this—not only among investors, but across the industry in general. To put it simply, blockchain is the technology on which bitcoin was first developed. Think of it this way: blockchain is to bitcoin what the Internet was to email. When the Internet was first developed, it was an amazing technology, but nobody really understood how to use it. Then email was introduced, and it quickly became the first ‘killer app’ of the Internet. Bitcoin is, in essence, the fist ‘killer app’ of blockchain.
Most of us are just beginning to grasp blockchain’s potential, and its uses are far greater and far wider than anything we can currently imagine. Like the Internet (and robotics and AI) blockchain will impact every sector of the economy and every company—from the largest-cap companies down to the smallest-cap companies, and from the most hi-tech to the most low-tech manufacturing type businesses.
So if blockchain isn’t bitcoin, what is it?
Blockchain is a global database. But unlike traditional databases, with blockchain, everyone on the planet has a copy of his or her own. So unlike centralized or decentralized database structures, in blockchain, there’s no way to change previous entries in the database. If one person were to alter an entry and take assets from someone else, the change would be evident in every single copy of the ledger. As a result, blockchain is a 100% reliable and distributable ledger of ownership, reflecting all of the owners of all of the different assets along the system at any given point in time. And everyone has access to it, all the time.
Bitcoin represents the money that is traded using blockchain. Bitcoin makes the ideal ‘killer app’ because a distributed ledger makes an awful lot of sense for trading money. For example, two people can never have a physical copy of the exact same dollar bill. But in the case of real estate titles, land records, or items being manufactured and distributed by multiple parties, recording these items on the distributed ledger not only prevents duplication, but it also eliminates the need for a back-office. In the financial services world, blockchain is causing huge disruption by eliminating the need for back-office recordkeeping. Prior to blockchain, a full staff was required to process a single stock transaction. Using blockchain, that transaction is immediate and transparent on the distributed ledger.
In the food industry, IBM worked with Walmart, Nestle and others to apply blockchain to their global supply chain. Today they can know within seconds where a piece of contaminated food was sourced—down to the exact farm and crop—so they can isolate and recall only the affected items. Because they no longer need to take the entire product line off the shelves, they are using blockchain to save billions of dollars. For a company like Walmart that has 1.5% margins, if they can shave off any cost within their supply chain, it is meaningful in regard to their earnings growth.
The Reality Shares Nasdaq NexGen Economy ETF helps investors capture the blockchain opportunity. The ETF tracks an index that is created in partnership with Reality Shares and Nasdaq. To start, the index uses the Reality Shares Blockchain Score methodology to identify companies that are most likely to be using blockchain in their businesses to become tomorrow’s disruptors—and to discern between companies who simply talking about blockchain and those who are really driving blockchain innovations. The process begins by evaluating the global universe of every publicly traded company on seven different factors.
The methodology looks at each company’s role in the blockchain ecosystem, stage of product development (are they just contemplating blockchain or actually in market with a revenue-producing item) and, if they are producing revenue with a blockchain solution, what kind of impact they are driving today. For example, IBM has invested heavily to become a major superpower in blockchain, but because of the size of the organization, the amount of blockchain impact required to move IBM’s stock price is huge. The methodology also looks at institute membership, and how much they are spending on R&D. How many filings have they made? How many blockchain patents have they applied for? How many have they received? All of those factors roll up to a score that is used to select the top companies that are added to the Reality Shares NASDAQ Blockchain Economy Index. The index is reevaluated and reallocated every six months.
The result is a well-diversified, global index that leans heavily toward technology, and includes some financials. 39% of holdings are in the US and the rest around the globe—a number that reflects the level of innovation outside our borders right now. Though as we’ve seen with other technologies, blockchain tends to cross these traditional boundaries to increase the potential value of the index for investors. The Reality Shares NASDAQ NexGen Economy ETF (NASDAQ: BLCN) that tracks the index was launched in January 2018.
Technology’s role in the 21st century portfolio
As you reposition your portfolios for the decades to come, there are many strategies to consider. In looking at your options, there is one thing that matters above all: performance. While it’s great to be able to go out to a client and talk about new, interesting stories, ultimately we are in a dollars and cents industry. So when you have a good story to tell and outstanding performance, you’ve found a homerun. Today, that homerun is emerging technologies.
The following chart compares emerging technology themes with the broad market over the past five years. As you can see, technology is leading the way from a returns perspective:
Technology stocks are today’s modern day industrials. Looking at the data, it’s clear that technology stocks have moved well beyond ‘hype’ to become the new benchmark for growth. One hundred years ago, the market leaders were GE, Chicago Gas Company, American Sugar Company, and railroads. Today, the leaders are Amazon, Microsoft, Intel, Apple, Facebook, Alphabet, Tesla, and Starbucks. These are the names that are driving the economy forward on a daily basis and the aforementioned disruptive companies in addition to many others are all a part of the Nasdaq-100, an index comprised of the 100 largest non-financial companies listed on Nasdaq.
What does that mean from a performance perspective?
The Nasdaq-100’s phenomenal returns tell the story. The index has been marked by both the growth and maturation of the companies within it. In the years following the financial crisis, P/E has stabilized, and increases in market cap and earnings have been substantial, growing from $3.1T in 2012 to $6.5T in 2017 and $137B to $204B, respectively. When you compare the performance of the index since 2003, what you see is massive outperformance compared to the S&P 500:
Even more, this performance was achieved without taking on excess risk. The volatility realized by the index during the intense growth period of 2013-2016 is right in line with the broad market. Note, also that during this period of outperformance, yield was also rising. The index’s ability to increase dividends in conjunction with very strong returns, and to continue to do that year over year, has resulted in a consistently increasing yield. The result: the Nasdaq-100 has outgained the S&P 500 by 150% cumulatively over the period, with only +1.3% risk—a slight increase that is more than offset by the excess returns that were generated:
Perhaps most impressive is the Nasdaq-100’s returns story. Since 2003, the Index has generated an incredible 2,000% growth in dividends on a cumulative basis since 2003. These dynamics make it a fascinating story for your clients, as well as a bona fide triple threat that includes:
- A strong fundamentals story on earnings,
- Revenue growth that far outpaces the broad market, and
- Dividend returns that outpace any other indices.
Clearly, technology has an important role in the 21st century portfolio. With the Nasdaq-100 leading the way for disruptive technology over the last 30 years since its launch in 1985, there are new and differentiated emerging technology indexes coming to market from Nasdaq that can work well when paired together. These new indexes are available to help investors capture this growth potential immediately. Though beware: because emerging technologies like robotics, AI, and blockchain are demonstrating such significant growth potential, many products that are coming to the market are thematic in name only and don’t really offer diverse exposure compared to the major indices. Nasdaq has attempted to solve that problem with the introduction of the Nasdaq Yewno Disruptive Technology Benchmark and its other assorted thematic indexes such as those mentioned here including the Nasdaq CTA Artificial Intelligence and Robotics Index and RealityShares Nasdaq Blockchain Economy Index. These indexes were designed so investors can operate with a more filled out picture of emerging technology across sectors and market capitalizations. Do your research. Identify products that are supported by methodologies that capture the technology exposure you are seeking. And, most of all, be sure you are taking action now to create a 21st century portfolio that is positioned to take full advantage of the exciting growth ahead in emerging technologies.
Nasdaq® is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
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