If you want to invest in the future, buy tech stocks. Or so
the conventional wisdom goes. But if you invest in either of the two most
popular tech exchange-traded funds—Technology Select Sector SPDR or Vanguard
Information Technology—about a quarter of your portfolio goes to just two
stocks— Apple and Microsoft. Worse, both ETFs have more than half their assets
in 10 stocks.
Will Apple (ticker: AAPL) and Microsoft (MSFT) be tomorrow’s
fastest-growing tech companies? That seems doubtful, given their already
immense size and the age of their legacy product lines. The future will belong
to newer innovations, and a new ETF aims to capture that.
The $1.2 billion iShares Exponential Technologies ETF (XT)
has a much broader definition of technology. Key to that definition is the concept
of “nonlinear” growth in the manufacture and usage of technology. Or as
Morningstar, which designed the Morningstar Exponential Technologies Index the
ETF tracks, put it in a white paper: “Exponential technologies [are] those
advances expected to create significantly positive, nonlinear economic benefits
for the companies that produce or use them.”
The exponential part turns the ordinary linear
upward-sloping revenue growth of a company into nonlinear J-shaped growth. That
growth is tied to the functioning of the technology itself. “If you’re familiar
with Moore’s Law, computer performance has been doubling every 24 months,” says
financial advisor Ric Edelman. “That’s an exponential growth rate.” Without
Edelman there would be no ETF: It was his research on exponential tech and
desire to invest in it that led him to approach BlackRock, which hired
Morningstar and launched the iShares ETF in March 2015. (Edelman receives no
compensation from the ETF.) He initially invested $628 million in the ETF and now
has $902 million in it.
Morningstar identified nine themes for its index, including
nanotechnology, bioinformatics, robotics, and 3-D printing. It then set its
team of 100 analysts to work finding the 200 companies with the greatest
exposure to these technologies. The index is equal-weighted so no one company
like Apple can dominate.
Still, the iShares ETF has
flaws. It employs analyst research to identify key players in new technologies,
but Morningstar’s analyst team covers about 1,500 mainly large and midsize
stocks worldwide—so many small tech companies are excluded. By contrast,
Vanguard Total World Stock holds 7,849 stocks.
Edelman
likes the ETF for his conservative client base, as small-cap tech can be higher
risk. Yet he acknowledges some of the sector’s growth is missing: “We are
seriously evaluating several other fund opportunities for that reason.”
Although he wouldn’t go into detail, if Edelman has any say, exponential tech
ETF 2.0 is on it Technology ETF
If you want to invest in
the future, buy tech stocks. Or so the conventional wisdom goes. But if you
invest in either of the two most popular tech exchange-traded funds—Technology
Select Sector SPDR or Vanguard Information Technology—about a quarter of your
portfolio goes to just two stocks— Apple and Microsoft. Worse, both ETFs have
more than half their assets in 10 stocks.
Will Apple (ticker:
AAPL) and Microsoft (MSFT) be tomorrow’s fastest-growing tech companies? That
seems doubtful, given their already immense size and the age of their legacy
product lines. The future will belong to newer innovations, and a new ETF aims
to capture that.
The $1.2 billion iShares
Exponential Technologies ETF (XT) has a much broader definition of technology.
Key to that definition is the concept of “nonlinear” growth in the manufacture
and usage of technology. Or as Morningstar, which designed the Morningstar
Exponential Technologies Index the ETF tracks, put it in a white paper:
“Exponential technologies [are] those advances expected to create significantly
positive, nonlinear economic benefits for the companies that produce or use
them.”
The exponential part
turns the ordinary linear upward-sloping revenue growth of a company into
nonlinear J-shaped growth. That growth is tied to the functioning of the
technology itself. “If you’re familiar with Moore’s Law, computer performance
has been doubling every 24 months,” says financial advisor Ric Edelman. “That’s
an exponential growth rate.” Without Edelman there would be no ETF: It was his
research on exponential tech and desire to invest in it that led him to
approach BlackRock, which hired Morningstar and launched the iShares ETF in
March 2015. (Edelman receives no compensation from the ETF.) He initially
invested $628 million in the ETF and now has $902 million in it.
Morningstar identified
nine themes for its index, including nanotechnology, bioinformatics, robotics,
and 3-D printing. It then set its team of 100 analysts to work finding the 200
companies with the greatest exposure to these technologies. The index is
equal-weighted so no one company like Apple can dominate.
Still, the iShares ETF
has flaws. It employs analyst research to identify key players in new
technologies, but Morningstar’s analyst team covers about 1,500 mainly large
and midsize stocks worldwide—so many small tech companies are excluded. By
contrast, Vanguard Total World Stock holds 7,849 stocks.
Edelman likes the ETF
for his conservative client base, as small-cap tech can be higher risk. Yet he
acknowledges some of the sector’s growth is missing: “We are seriously
evaluating several other fund opportunities for that reason.” Although he
wouldn’t go into detail, if Edelman has any say, exponential tech ETF 2.0 is on
its way.
