As we explore the innovation landscape, a comprehensive, global, and forward-thinking exchange traded fund may be the answer to the core issues facing innovation-centric investors in the coming year.
In the recent webcast, Looking Beyond the FAANMGs: Seeking to Identify Tomorrow’s Tech Leaders Today, Goldman Sachs Asset Management’s GTEK portfolio managers Brook Dane and Sung Cho, along with ETF specialist Griffin Gall, argued that as the pace and scale of innovative disruptions accelerate, investors would be remiss in not adopting a innovation-themed investment strategy to position their investment portfolios for the future.
“We believe investors need to be on the right side of disruption and position their portfolios for the future,” said the strategists.
“In our view, investors should go global and down in market cap to get exposure to the most attractive tech opportunities,” they added.
Investors who are reliant on traditional equity benchmarks are overexposed to mega-cap technology companies that have already made a name for themselves. For example, the top 5 largest components in the S&P 500 make up 22% of the index. Additionally, the rest of the benchmark is comprised of companies that could be replaced when a new or better technology comes along.
“We believe more than 70% of the companies in the S&P 500 are at risk of disruption,” said Goldman Sachs.
The strategists highlighted the boom in technology innovation that has come with increased global connectivity and accelerated public cloud adoption. For example, the average monthly data usage per smartphone globally is 10 gigabytes. There are 6.1 billion smartphone users globally, compared to 3.5 billion toothbrushes sold each year. The average cost to start a business is down to $5,000 from $5 million in 2000, which is enabling more participants and fueling further innovation.
However, the strategists warned that many investors are underexposed to these new up-and-coming innovators.
“We believe there is a fundamental disconnect between where most investors are positioned and where we see the most compelling potential opportunities,” the strategists said.
On the other hand, Goldman Sachs has highlighted six key areas of opportunities for investors: smart components, fintech, emerging e-commerce, cyber security, digital transformation, and online entertainment.
Goldman Sachs argued that semiconductors are the new “oil” in the tech world, as semis play a crucial role in enabling technological innovation across growing nascent industries like electric vehicles, artificial intelligence, online gaming, 5G networks, cloud computing, and the internet of things.
Innovation in the financial sector is driving new possibilities for consumers, businesses, and governments across new financial services industries like peer-to-peer payments, smart terminals, neobanks, business-to-business payments, and cryptocurrency.
E-commerce growth is accelerating faster than historical averages as new entrants emerge globally. About 47% of global digital sales are outside of the U.S. and China. Global e-commerce growth accelerated even further in 2020, and Goldman Sachs believes that e-commerce will continue its dominance for years to come.
In an increasingly digital world, the need for cybersecurity is growing rapidly to meet new threats to the system. Cybersecurity affects all sectors of the economy and could potentially become a $380 billion market by 2028.
Enterprise spending on digitization continues to increase as leveraging the latest technology is critical for business success. We are witnessing a digital transformation as the move to the public cloud is accelerating and CIOs continue to increase their IT spending.
Lastly, the rise in mobile use and virtual reality (VR) / augmented reality (AR) technologies makes the gaming industry ripe for innovation. Mobile use grew 460% between 2011 and 2021. On average, people open their smartphones 58 times per day. Every day, people spend an average of 4 hours 12 minutes on their cell phones.
As a way to capitalize on these growing trends, investors can look to the Goldman Sachs Future Tech Leaders Equity ETF (GTEK), a fully transparent, actively managed equity ETF that will generally invest in listed technology companies with market capitalizations of less than $100 billion across both developed and emerging markets. Goldman Sachs also invests in the fund alongside its clients.
Being at the forefront of technological innovation is critical to success in a digital world where the pace of change continues to accelerate. GTEK will seek to identify potential future tech leaders through active, bottom-up security selection with a disciplined approach to valuation. By investing in a fully transparent active ETF, investors may benefit further from being able to access these opportunities through an innovative wrapper.
Specifically, more than 50% of the portfolio is comprised of companies developing new models or challenging existing ones. About 30% to 40% of the portfolio includes companies that are potentially consistent growers over time. Lastly, up to 10% of the portfolio includes more mature companies adapting to new technology disruption.
The recently launched Goldman Sachs Future Planet Equity ETF (GSFP) can also help investors position their portfolios on the right side of disruption by providing focused exposure to long-term secular growth trends.
The ETF intends to invest in companies that seek to provide solutions to environmental problems aligned with five key themes: clean energy, resource efficiency, sustainable consumption, the circular economy, and water sustainability. GSFP will conduct active, bottom-up security selection to target companies with the potential to drive more sustainable practices and deliver strong returns across various sectors, geographies, and market capitalizations.
Additionally, the reorganized Goldman Sachs Innovate Equity ETF (GINN) offers exposure to five themes: a data-driven world, finance reimagined, human evolution, a manufacturing revolution, and the new age consumer. These five themes have been combined on an equal-weighted basis in GINN.
GINN seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Solactive Innovative Global Equity Index. The index is owned and calculated by Solactive AG. The index combines the five themes on an equal-weighted basis to provide exposure to companies that may benefit from technological innovation and the resulting changes in the economy.
Financial advisors who are interested in learning more about an innovation-centric investment strategy can watch the webcast here on demand.
For more news, information, and strategy, visit the Future ETFs Channel.