Throwing Technology Over the Wall
I was listening to someone talking about monolith versus microservices structures recently, and they likened it to an old car versus a new one.
Old cars were made of metal and welded together into a solid machine where, if any part breaks, you have to replace the whole machine. The machine is unwieldy, slow and hard to change. A new car is moulded and put together as a network of components. Each component is independent of the machine, and can be therefore switched out quickly and easily and replaced. The machine is fast, easy and speedy to change.
Nice analogy, and speaks to two themes that I would advocate for any organisation.
The first is how to organise your developer team. I always fall back to the discussion with one start-up who uses Amazon’s two pizza approach as their focus. Each Amazon development team is structured to a size where they can be fed with a maximum of two pizzas for lunch. For Jeff Bezos, small teams make it easier to communicate more effectively, to stay decentralised and moving fast, and encourage high autonomy and innovation. This is so obviously the case today in an API marketplace structure that it demands such decentralised approaches.
The second theme is how a bank should structure. A bank has historically controlled everything in their value chain, and tightly coupled that chain. Banks do not trust decentralisation, but want close control as that allows them to secure everything. Security and control avoids risks and exposures, so a heavy metal machine is far better than a light plastic one. But if a bank continues to try to control the value chain then, as I’ve written many times, it will make them slow and resistant to change which, in today’s Open Banking world, will signal irrelevance and obsolescence.
For these reasons, a bank needs to decentralise their internal structures and open their eyes to external opportunities to source components of their value chain through APIs.
Now I know that many banks are doing this, especially the usual suspects who market themselves as technology companies offering digital banking. For example, many banks have innovation labs and development portals like those of Citibank and Deutsche Bank. A growing number have API (Application Programming Interfaces) marketplaces like those of BBVA and DBS (nearing 200 APIs) .
This shows the eagerness of the banks to change, and the fact they are changing. However, I have heard several comments from some of these banks expressing concern about the alignment of their digital innovation initiatives and the lines of business they are trying to change and serve. This stretches to the heart of why I talk about the major risk in banking today is a lack of digital leadership.
Many bankers are asked if they’re working on Open Banking and APIs and many may start by a frown, wondering what the hell you’re talking about, whilst others may be aware, but they don’t see it as their turf. It’s being dealt with by the CIO.
This is why I keep saying that digital is a cultural and business transformation programme, and not a project or a function. Digital yes, involves opening up through APIs and SDKs (Software Developer Kits) but, far more importantly, is aligning the changes to the products, services and line of business needs, and getting those line of business leaders to be aware, involved and articulating the change to their teams, clients and customers.
Without the latter, it’s a bit like throwing technology at a wall. It just breaks.
An Emerging Theme In Thematic Investing
Exchange traded funds (ETFs) are popular vehicles for market participants looking to engage in thematic investing. Thematic investing looks to take advantage of future growth trends, including disruptive technologies. Given that forward-looking approach, stock-picking in the thematic universe is equally as hard, if not harder, than in traditional market segments.
Go back to the late 1990s, before the bursting of the Internet/technology bubble. Back then, investors stood an equal chance of selecting E-Toys over Amazon or some no longer in existence networking equipment maker over Cisco.
“History is littered with examples of prospering industries with no indication of which company will come to dominate the industry,” according to Nasdaq. “This suggests that successful thematic investing is more about selecting baskets of investments rather than single securities.”1
The ALPS Disruptive Technologies ETF (DTEC) provides basket exposure to a broad swath of thematic investments. DTEC features exposure to not just one or two emerging technologies, but 10 such themes on an equal-weight basis.
The 10 themes represented in DTEC are as follows: 3D printing, clean energy, cloud computing, cybersecurity, data and analytics, fintech, healthcare innovation, Internet of Things (IoT), mobile payments and robotics and artificial intelligence (AI).
Generally speaking, fund issuers have been quick to respond to disruptive and transformative technologies, bringing products to market to tap these themes. Prior to DTEC coming to market late last year, there were ETFs devoted exclusively to cloud computing, cybersecurity, robotics and other themes featured in DTEC. However, few use the basket approach to themes employed by DTEC.
February, a rough month for U.S. stocks, highlighted the advantages of DTEC's multi-theme methodology. Seven of the 10 themes found in the fund finished the month lower, but DTEC was able to outperform the S&P 500 on a monthly basis.
Focusing on individual themes can be rewarding over the long-term, but not all investors have the risk tolerance for such a strategy. Consider this: the Indxx Global Robotics & Artificial Intelligence Thematic Index jumped more than 48% in 2017. That type of performance is enough to seduce many investors, but that same benchmark slipped 7.60% in February, generating monthly volatility of 34.10%.2 Said another way, that robotics and AI index's February slide was more than triple the loss experienced by DTEC during the month.
While it probably is not accurate to call the indexes devoted to individual disruptive themes “old,” many use old school weighting methodologies. For example, the two largest components in the ISE Cloud Computing Index are Netflix, Inc. (NFLX) and Amazon.com Inc. (AMZN). Only two members of the S&P 500 have larger market values than Amazon while Netflix currently has a larger market cap than Wal-Mart (WMT) and McDonald's (MCD).
Holdings subject ot change as of 12/31/17
For its part, DTEC not only equally weights its 10 disruptive themes, but its 100 components as well, potentially reducing single stock risk in the process. As the chart below confirms, equally weighting stocks is rewarding across sectors and market capitalization segments.
Past performance does not guarantee future results
Annualized returns for the past 10 years show seven of the 11 S&P 500 sectors, when equally weighted, outperform cap-weighted equivalents, according to S&P. Three of those seven sectors – financial services, healthcare and technology – are prominent parts of DTEC's roster.
1 Source: Nasdaq Dec. 28, 2015 https://www.nasdaq.com/article/what-thematic-investing-is-and-its-strengths-and-risks-cm559209
2 Source: ETF Replay data
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
An investment in the ALPS Disruptive Technologies ETF (DTEC) may be subject to substantially greater risk and volatility than investments in larger and more mature technology companies.
There is no assurance that the market developments and sector growth based upon the themes discussed in the article will come to pass.
ALPS Disruptive Technologies ETF shares are not individually redeemable. Investors buy and sell shares of the ALPS Disruptive Technologies ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of AAI. In addition, AAI assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus. Past Performance is not indicative of future results.
The fund is new and has limited operating history.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Disruptive Technologies ETF. AAI is affiliated with ALPS Portfolio Solutions Distributor, Inc.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
S&P 500®: A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
S&P SmallCap 600®: A capitalization-weighted index that measures the small-cap segment of the U.S. equity market.
S&P MidCap 400®: A capitalization-weighted index that measures the mid-cap segment of the U.S. equity market.
Indxx Global Robotics & Artifical Intelligence Thematic Index: The Indxx Global Robotics & Artificial Intelligence Thematic Index is designed to track the performance of companies listed in developed markets that are expected to benefit from the increased adoption and utilization of robotics and Artificial Intelligence ("AI"), including companies involved in Industrial Robotics and Automation, Non-Industrial Robots, Artificial Intelligence and Unmanned Vehicles.
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