By Jeff Spiegel, Head of U.S. iShares Megatrend and International ETFs, iShares
- Mega-cap technology companies could face increased regulatory scrutiny following the U.S. election
- Targeting smaller tech companies may help investors access emerging growth trends and temper exposure to companies most exposed to greater oversight
- Megatrends offer multi-sector exposure within areas of innovation, an alternative for growth-seeking investors beyond tech giants
Large U.S. technology stocks have been prime drivers of 2020’s post-COVID market rebound as well as the highest-returning sector, by far, over the past decade.1
The 2020 U.S. election could keep the spotlight on big tech, as concerns around data privacy and market power make regulation an area of growing bipartisan concern.
A Joe Biden administration could potentially bring more strenuous anti-trust reviews around issues such as wages and platform power, according to the BlackRock Investment Institute. And the potential for tax reforms if Democrats sweep Congress could also weigh on global tech giants. Overall, the BII views the regulatory risks faced by mega-cap tech companies as manageable, as many have already adjusted to tougher data privacy rules in Europe.
For tech investors over the long-term, the election highlights the potential for leadership within the sector to broaden to a wider set of beneficiaries across different themes, including 5G connectivity that is expected to turbocharge the internet. Some tech companies could also benefit from the clean energy transition and a shift toward greater energy efficiency.
Consider stepping down a size
Equity investors might reconcile the potential for regulatory headwinds in big tech with the “new normal” dependency on virtual services by targeting small- and mid-sized companies with exposure to services that enable working, shopping, and learning from home.
Newer market entrants are less likely to be encumbered by new regulation, offer more potential upside and can be nimbler in the face of long-term regulatory trends.
At the same time, small firms working on next-gen technologies tend to be more singularly focused on developing core products rather than large ones, so investing in small companies can allow investors to capture shares of companies that are well positioned to benefit from structural shifts to how people live. Consider that approximately 31% of workers who were employed in early March had switched to working at home by April.2 More time spent online requires additional concerns about security. Even amid an economic recession, information security spending is expected to grow 2.4% to reach $123.8 billion in 2020, with cloud-based security offerings and subscriptions poised to increase 33%.3 And, as more businesses consider the potential benefits of automating manual labor, robots could permanently replace two million manufacturing jobs by 2025.4
The megatrend approach to tech
Investors looking for more targeted exposure to emerging trends, as well as those who are mindful of concentration risks, might consider equity indexes that seek to provide exposure to megatrend themes. This is not to say that investors should steer their portfolios away from what has worked in the past; rather, they might reconsider how they access diversified tech exposure beyond Facebook, Apple, Amazon.com, Microsoft and Google-parent Alphabet (FAAMG) and into a broader range of multi-sector innovators.
Indexes including the NYSE FactSet Global Cybersecurity Index and the NYSE FactSet Global Robotics and Artificial Intelligence Index straddle conventional classifications for a company’s sector, size, and region to better reflect the realities of the new and increasingly virtual economy. They are less top-heavy than traditional information technology sectors. For example, just five U.S. companies account for 56% of the S&P 500’s Information Technology sector index.5
Summing it up
The 2020 election may increase regulatory scrutiny on mega-cap technology companies, some of the stock market’s best performers in recent years.
For equity investors, the election offers a chance to examine their portfolio to ensure that equity positions are targeting the most salient long-term investment themes and that equity holdings are not overly concentrated in a few large companies.
Given the accelerated rate of advancement in the fields of virtual work and life, AI and robotics, and cybersecurity, growth-focused investors may find that megatrend investing could help more directly target the breakthroughs made by lesser-known companies.
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Originally published by iShares, 10/16/20
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1 Bloomberg, Morningstar (as of Oct. 6, 2020). S&P 500’s Information Technology sector has returned 29.4% in 2020 (through Oct. 6) and 505% over the trailing 10 years (19.5% annualized).
2 U.S. Bureau of Labor Statistics (June 1, 2020), “Ability to Work from Home: Evidence from Two Surveys and Implications for the Labor Market in the COVID-19 Pandemic: Monthly Labor Review.”
3 Gartner (as of June 17, 2020).
4 Semuels, Alana, “Machines and AI Are Taking Over Jobs Lost to Coronavirus.” Time (Aug. 6, 2020).
5 Bloomberg (as of Oct. 1, 2020).
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