Not surprisingly, one of the most promising frontiers for thematic investing is the technology sector. Within this space, an array of industries can be considered “disruptive” and are benefiting from major demographic trends along with changes in corporate and government spending.
One issue facing advisers and investors is how to efficiently unify disruptive technology investments. Broadly speaking, many funds rooted in thematic investing that feature access to fast-growing technologies focus explicitly on just one theme or industry. Emphasizing just one promising technology theme has some risks.
First, by focusing on a single theme, the investor is timing market sentiment toward that theme. As is the case with any other corner of the financial markets, sentiment shifts, meaning a theme that is in favor this month can retreat next month. Second, isolating one fast-growing theme ignores the relationship many disruptive technologies share with each other.
A Burgeoning Relationship
Over the past several years, investors have heard more and more about the opportunity set in the cybersecurity space. An onslaught of now infamous cybercrimes and hacks highlighted the potentially strong fundamental case for cybersecurity investing. Business and government spending projections support that case, but new cyber threats are evolving at an alarming rate, opening the door for other disruptive technologies to join forces with cybersecurity to bolster solutions.
“New cyber threats are evolving rapidly as a new malware program is created every 4.2 seconds according to G Data,” said Bowery Capital. “Additionally, malware injection speed is increasing exponentially and cyber protection software meant to scan for malware is often slower than the infiltration itself. Because of the lag-time, most cybersecurity solutions are in a reactionary state, caught in a pattern of detect and protect.”1
A prime avenue for cybersecurity firms combating the constantly evolving malware universe is with artificial intelligence (AI) and robotics technologies. AI and robotics just happen to be another disruptive technology theme and its relationship with cybersecurity is not only practical, but growing as well.
“Machine learning algorithms can utilize droves of data to accurately predict in real-time when and where an attack will occur in order to preventively secure valuable data,” according to Bowery. “AI-based tools will also be able to use data to recognize malware that it has never seen before.”
On its own, the AI and robotics theme is booming. Data confirm as much. Business value from AI “is projected to total $1.2 trillion in 2018, an increase of 70 percent from 2017, according to Gartner, Inc. “AI-derived business value is forecast to reach $3.9 trillion in 2022.”2
Other promising themes intersect with AI and cybersecurity, including Internet of Things (IoT). Underscoring that idea, the U.S. Senate last year introduced the “‘Internet of Things Cybersecurity Improvement Act.” In just two years, there could be 20 billion or more IoT devices online, all needing rapidly evolving, enhanced security.
“The challenge remains that IoT devices are vulnerable to botnets which can be used to unleash volumetric distributed denial of service (DDoS) attacks which would disrupt bandwidth on vital devices such as cars, lighting grids or pacemakers,” according to Bowery.
Translation: AI and robotics, cybersecurity and IoT are separate themes, but they will constantly be intersecting with each other for years to come.
The Umbrella Approach
The ALPS Disruptive Technologies ETF (DTEC) provides equal-weight exposure to 10 disruptive themes, including AI and robotics, cybersecurity and IoT. Year-to-date, as of June 4th 2018, DTEC is outperforming the Indxx Global Internet of Things Thematic Index and the Indxx Global Robotics & Artificial Intelligence Thematic Index.
1 Source: Bowery Capital March 1, 2018 https://bowerycap.com/blog/insights/three-cybersecurity-trends-2018/
2 Source: Gartner, Inc. April 25, 2018 https://www.gartner.com/newsroom/id/3872933
Important Disclosures & Definitions
This material must be preceded or accompanied by a prospectus. Please read it carefully before investing.
Standardized performance for the ALPS Disruptive Technologies ETF (DTEC) can be found here. Current holdings for DTEC can be found here.
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 ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
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.
Disruptive Technology Theme Risk. Companies that the Index Provider believes are developing disruptive technologies may not in fact do so or may not be able to capitalize on those technologies. Companies that develop disruptive technologies may face political, legal or regulatory challenges. Such companies may also be exposed to risks applicable to industries or sectors other than the disruptive technology Theme for which they are chosen and may underperform relative to other companies that are also focused on a particular Theme.
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.
An investment in the Fund is subject to investment risk including the possible loss of the entire principal amount that you invest.
Companies that the Index Provider believes are developing disruptive technologies may not in fact do so or may not be able to capitalize on those technologies. Companies that develop disruptive technologies may face political, legal or regulatory challenges. Such companies may also be exposed to risks applicable to industries or sectors other than the disruptive technology Theme for which they are chosen and may underperform relative to other companies that are also focused on a particular Theme.
Smaller and mid-size companies often have narrower markets, more limited managerial and financial resources and a less diversified product offering than larger, more established companies. As a result, their performance can be more volatile, which may increase the volatility of the Fund’s portfolio.
The large capitalization companies in which the Fund invests may underperform other segments of the equity market or the equity market as a whole.
The Fund’s investments in non-U.S. issuers may involve unique risks compared to investing in securities of U.S. issuers, including, among others, less liquidity generally, greater market volatility than U.S. securities and less complete financial information than for U.S. issuers. In addition, adverse political, economic or social developments could undermine the value of the Fund’s investments or prevent the Fund from realizing the full value of its investments. Finally, the value of the currency of the country in which the Fund has invested could decline relative to the value of the U.S. dollar, which may affect the value of the investment to U.S. investors.
The fund is new and has limited operating history.
Indxx Disruptive Technologies Index (IDTEC): based around companies that enter traditional markets with new digital forms of production and distribution, are likely to disrupt an existing market and value network, displace established market leading firms, products and alliances and increasingly gain market share.
Indxx Global Internet of Things Thematic Index – is designed to track the performance of companies listed in the developed markets that are expected to benefit from the increased adoption of the Internet of Things (IoT), including companies across a diverse set of segments including but not limited to smart grids, smart homes, smart cities, connected cars and the industrial internet.
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 of robotics and Artificial Intelligence (“AI”), including companies involved in Industrial Robotics and Automation, Non-Industrial Robots, Artificial Intelligence and Unmanned Vehicles.
Artificial intelligence (AI) is the intelligence exhibited by machines or software. One of the central problems (or goals) of AI research include natural language processing (communication).
One may not invest directly in the index.
Thematic Investing: Designed to participate in longer term technological disrupters, economic and political developments and social trends.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Disruptive Technologies ETF
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