There’s plenty of fervor in the technology sector, stoking concern of a repeat of the 2000 tech wreck, but this a new era and many of the components residing in the ALPS Disruptive Technologies ETF (DTEC) are on firm ground.
DTEC tracks the Indxx Disruptive Technologies Index, which identifies companies using disruptive technologies across ten thematic areas, including Healthcare Innovation, Internet of Things, Clean Energy and Smart Grid, Cloud Computing, Data and Analytics, FinTech, Robotics, and Artificial Intelligence, Cybersecurity, 3D Printing, and Mobile Payments.
Not only do many DTEC components have the looks of quality growth companies, but there are also favorable fundamentals buoying growth in the technology sector.
“For investors concerned about the relentless rise of technology stocks, it is important to ask whether the early ’20s are becoming a repeat of the late ’90s?,” according to BlackRock. “Tech outperformance is not based on hype or clever mascots but on three dynamics: earnings strength, accommodative monetary policy and accelerating secular trends.”
DTEC's Rising Relevance
Beyond the obvious of thematic diversification, an important offered by DTEC is leverage to the intersection of the various themes. What that means is that many disruptive themes have links to each other, something that single theme funds often don’t address.
As just one example, cloud computing is contributing to DTEC bullishness.
The rise of cloud computing has never been more apparent amid the Covid-19 pandemic. With social distancing measures in place, a lot of businesses have their heads in the clouds—that is, using cloud computing as a primary way to run their core businesses—something that will benefit cloud computing ETFs, such as DTEC. Moreover, earnings growth in the tech sector is stellar.
“The main reason tech companies continue to dominate: Earnings and margins remain remarkably resilient. This year’s estimates for the S&P 500 Technology Sector suggest earnings growth of nearly 19%. One reason earnings have held up: Many of the industries in technology, notably software, continue to maintain sky-high margins, despite the disruptions caused by COVID,” according to BlackRock.
Low-interest rates, which will be around for some time, are also benefiting DTEC.
“To the extent, the Fed and other central banks are increasingly dedicated to and comfortable with a regime of negative real rates, this is supportive of long-dated assets, i.e. assets where your cash-flows tend to be further in the future, such as growth stocks,” according to BlackRock.