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Investing in a Disruptive World: How Technology Has Changed Everything

Investing in a Disruptive World: How Technology Has Changed Everything

By Robert Hughes, Head of Index and Adviser Solutions, Nasdaq Global Information Services

In the grand scheme of technological advancement, it wasn't long ago that smartphones were the emerging technology of the day. Within a little more than a decade, they've become fundamental to everyday life in much the same way as other defining modern technologies like social media, streamed entertainment content, cloud computing and e-commerce.

This road from disruption to the new normal has been paved over by these overarching popular technologies, and this time frame gets shorter with each new cycle. Now, another crop of disruptive technologies like machine learning, image recognition, bioinformatics, big data, 3D printing, drones and wearable/implantable technologies may remake the world.

Yet even if technological disruption is a given, harnessing the pace of change can be difficult. The paradigm around disruptive technology as an economic driver has shifted. As a result, investors need to take a hard look at how technology factors into building a portfolio that keeps up with the pace of innovation.

What makes a technology company?

On the face of it, identifying a technology company seems a rather easy task. The likes of Facebook, Amazon and Google are at the top of the list, but look closer and the distinctions become less clear. These companies transcend sectors and industries: Amazon may be best known for its e-commerce arm, but it's also a national grocer, and it takes in more revenue from cloud computing than it does from selling consumer goods. Google, similarly, is developing driverless cars—an arena where auto companies like Ford and Tesla are already active—and Facebook is flirting with the idea of a dating service.

The common thread is technology. While the most high-profile disruption has played out in retail, sectors such as finance, health care, energy, manufacturing and communications have likewise felt the influence of these developments. Technology has changed the way we think, buy, talk, learn, drive, watch, listen, read, work, live—and invest.

Investing for the 21st century

Just as technology has fundamentally transformed everyday life and how we approach it, so too has it altered investing and the decision-making behind it.

There's a new market dynamic: Where once industrials ruled, the scepter is now in the hand of technology. The role of cornerstone companies that generate cash and pay dividends has been filled by Microsoft, Cisco and Intel. The FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks lead the way in innovation and ubiquity, generating continued growth, while exciting new disruptors in diverse areas—robotic surgery, AI, mobile payments—push the boundaries of what were and were not previously considered tech sectors.

But technology is hardly an exclusive club of niche Internet startups or the latest apps. It goes beyond the traditional sector classifications to affect all types of companies under the unifying perspective that technology is a driving force of change and progress more than a label.

So how do investors seek to capitalize on this new reality and build exposure to these successful companies and to the disruptive trends driving progress and shareholder value? How do investors meet the challenge of investing for the future in a world that is undergoing such significant change?

Well, there's always picking individual stocks—who knows if you may hit on the next Amazon—but the overriding strategy of the day has become indexing and using exchange-traded funds (ETFs). Building a portfolio via an index tracking product provides a number of advantages: elimination of single stock risk and volatility, improved daily liquidity, relatively lower costs, and an ability to focus your investment on a particular (disruptive technology) theme.

One example of how ETFs have become the door to wealth creation and management are ETFs that track the NASDAQ-100 Index (NDX). NDX components represent companies leading the way in embracing the growing synchronicity between technology and business success. Facebook, Alphabet, Amazon, Apple, Netflix, Tesla, Cisco, and Microsoft have led innovation and change across multiple industries. The expansion of NASDAQ-100 Index linked ETFs around the world has enabled more investors to position their portfolios gain exposure to the dominant tech innovators, modern industrials and boundary pushers driving global growth and innovation all in the purchase of one share.

Investors can then build on a core holding of NDX and drill down further into the disruptive technologies of today by looking for ETFs that are tied to specific pure play thematic indexes. Demand for thematic investment products only seems to be increasing, with ETFs and indexes offering exposures to artificial intelligence and robotics, cybersecurity and biotech all seeing significant inflows. Nasdaq recently partnered with artificial intelligence company Yewno to create an index tracking and utilizing disruptive technology. The index covers seven major disruptive technological themes and 35 sub-themes and is built to include new disruptive technologies as they come to market. The indexes that Nasdaq has built with Yewno and other partners show how incredibly wide and diverse the world of technology has and will continue to become.

In building a portfolio that can keep the pace with rapid change, investors must be cognizant of the fading boundaries of traditional business. Technology is fueling incredible change across all industries, and sectors that are well defined today may not be so assured a few years from now. The future of investing means aligning with technology and embracing change. The ETF space enables investors to gain meaningful technology exposure and keep aligned with the rapid pace of technology.

Download the entire research paper “Creating the 21st Century Portfolio” here.

This article originally appeared in SiliconIndia on August 10, 2018.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.