Alpha Opportunities in the Technology Sector

The new year brings several challenges to investors around the world, but there are also many promising new opportunities. In the 2017 Themes series, ETF Database will highlight five prevailing themes for the year that investors may want to consider for their portfolios. These themes range from opportunities in the technology sector to a potential rebound in the energy sector and cover exchange-traded funds (ETFs) that investors can use to gain exposure.

Artificial intelligence was consigned to science fiction until breakthroughs in processing and open-source software brought it closer to reality. Graphical processing units (GPUs) brought parallel processing power to speed up deep learning by a factor of up to 50x, while Google’s development and release of Tensor Flow made powerful machine-learning algorithms free to anyone to implement in their own applications.

Tractica forecasts that the market will grow from $643.7 million in 2016 to $38.8 billion by 2025. According to the analyst firm, these technologies will include machine learning, deep learning, computer vision, natural language processing, machine reasoning and so-called ‘strong AI.’ Of course, the impact of ‘strong AI’ capable of human-level reasoning would be difficult to quantify and could accelerate the market.

The easiest way to build exposure to artificial intelligence is through the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ B-), which provides diverse exposure to companies like SMC Corp. (SMECF) and ABB Ltd. (ABB) with a modest 0.68% expense ratio. Those willing to build a hands-on portfolio may also consider adding stocks like Alphabet Inc. (GOOGL) or IBM Corp. (IBM).

There is little doubt that our lives are becoming more connected every day. Smart appliances and Nest thermostats may still be a luxury item for many Americans, but these same technologies are being applied by companies and governments to operate more efficiently. The core concept, known as Internet of Things (IoT), involves cost-effectively connecting devices to the internet to make them more useful to consumers and businesses.

McKinsey & Co. estimates that the Internet of Things market will grow at a 32.6% compound annual growth rate from $900 million in 2015 to $3.7 billion by 2020. Meanwhile, Gartner projects that the number of connected devices will increase from 6.4 billion in 2016 to 20.8 billion by 2020. These devices include smart appliances, autonomous vehicles, semiconductors, manufacturing equipment and much more over time.

Investors can build exposure to Internet of Things technologies into their portfolio with the Global X Internet of Things Thematic ETF (SNSR B-), which holds companies like Garmin Ltd. (GRMN) and ST Microelectronics NV (STMEF) with an expense ratio of 0.68%. Those willing to take a more active approach to building a portfolio may also consider individual companies operating in the growing space.

Robotics may be responsible for the wave of populism sweeping the United States – as manufacturing jobs are replaced by automation – but these trends are unlikely to slow as the industry continues to replace more advanced jobs. In fact, advanced robotics were responsible for eliminating 85% of the 5.6 million manufacturing jobs lost between 2000 and 2010 compared to just 13% eliminated through international trade.

IDC forecasts that global spending on robotics and related services will grow at a 17% compound annual growth rate from $71 billion in 2015 to $135.4 billion by 2019. This growth will be driven by discrete and process manufacturing industries, which represented 33.2% and 30.2% of total spending in 2015, respectively. Manufacturers have leveraged these robots to increase output by nearly 40% over the past 20 years.

The Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ B-) provides investors with exposure to the sector, along with artificial intelligence, but the Robo Global Robotics & Automation ETF (ROBO B) may provide more of a pure-play opportunity. Investors can also invest in individual equities involved in the robotics space, including companies like iRobot Corp. (IRBT) and AeroVironment Inc. (AVAV).

Investors have several options for building these themes into their portfolios, including the specific ETFs mentioned and broader technology ETFs.

Those looking for broad exposure may want to consider:

Before investing in any ETFs, investors should carefully consider the exposure to their desired subsets of the technology industry. Most large funds are weighted based on market capitalization, which may assign too much value to consumer electronics companies like Apple Inc. (AAPL), rather than AI or robotics firms. Investors should also consider the expense ratio before investing since it can have a significant impact on returns over time. Compare various ETFs using the Head-to-Head Comparison tool.

For a full list of Artificial Intelligence ETFs, click here.

There are many extremely promising themes within the technology sector, including artificial intelligence, Internet of Things technologies and advanced robotics. Investors can build exposure to these sectors into their portfolio using ETFs, individual stocks or a combination of the two, while being mindful of the expenses and other considerations.

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For more information on other investing themes for 2017, be sure to check our 2017 Investing Themes page.