COVID Accelerates High-Tech Disruption: Are Your Clients In The Hot Spots?

This is clearly an inflection point. Global society remains in the grip of a once-a-century health crisis and an economic recession Federal Reserve Chairman Jerome Powell calls "the worst in our lifetime."

And yet the NASDAQ Composite, loaded with the biggest technology stocks, is deep in record territory. A casual observer focused exclusively on this end of the market would likely be surprised to hear the early pandemic shocks had even occurred.

While this is clearly exuberance, technology's ability to shake off the virus isn't as irrational as some commentators suggest. These are the companies that were already capturing share from entrenched competitors as consumption and enterprise behaviors shift.

By disrupting the status quo, the virus has also accelerated this process, giving the companies at the heart of change an opportunity to meet growth targets years ahead of schedule. Long-term revenue forecasts on Zoom Video Communications Inc. (ZM), for example, are now tracking 50% to 60% above pre-pandemic levels as large and small enterprises cut off from face-to-face collaboration crowd into teleconference environments.

As Global X analyst Pedro Palandrani recently noted, 

Long term structural trends, by definition, take time. The development and adoption of new technologies, the changes in deeply-ingrained consumer behaviors, or the materialization of demographic shifts don’t happen overnight. Yet . . . by and large, the COVID-19 pandemic is proving to be an accelerant for many long-term structural trends.

Prescient (or at least alert) investors have unquestionably benefited from this acceleration. The Global X Thematic Growth ETF (GXTG), which incorporates seven emerging trends in a single diversified structure, is up a robust 26% YTD, practically matching the NASDAQ Composite with securities drawn from a very different universe.

While QQQ is overloaded with gigantic U.S. stocks that earned their reputation in the 1990s technology boom, GXTG concentrates on much less mature companies (average market cap is under $90 million) that have more room to evolve into the giants of tomorrow. 

They operate in industries that thrill futurists: financial technology (23% weight), electronic commerce (20%), social media (19%), lithium (10%), automation (10%), the Internet of Things (9%) and longevity research (9%). 

All of these themes are doing well this year and many are outperforming QQQ by as much as 20 percentage points YTD. After all, this is where investors are looking for hope in an otherwise brittle fundamental environment. 

Against a backdrop of apocalyptic profit and revenue declines for most sectors, even a hint of growth is a beacon for investors buoyed by the Fed's largesse and yet apprehensive about conditions in the "old" economy. After a quarter when revenue across the S&P 500 fell 9%, every percentage point of year-over-year progress is more precious.

But projecting growth rates can be a precarious business. Even when we see a disruptive theme transforming the economic landscape, many or even most initially promising business models will falter along the way. A diversified portfolio raises the likelihood that the investor will capture both the ultimate winners and the expansion of the theme itself while it matures. 

That's the thesis that drives the burgeoning universe of thematic investing. Identify the right trend, research the key players, weight them appropriately and mirror their aggregate performance. Over time, the trend does all the heavy lifting and our clients find themselves on the right side of historical disruption.

And since disruption respects no borders, there's no guarantee that the ultimate winners will be U.S.-listed companies. GXTG is especially efficient when it comes to providing exposure to global enterprise. Fully half the portfolio is invested overseas to reflect innovation wherever it originates. Even if broad-based NASDAQ funds made room for companies at this stage, investors would still need to buy into completion funds to get the full story.

We can quibble over which themes are most dynamic in a post-COVID world, but Global X re-weights the fund mix regularly . . . and if you have a contrarian view, you can always reach for the constituent funds yourself to put together your own map of tomorrow. 

The company lays out all the logic HERE. This could be the start of the next generational bull run, provided of course that your clients have the hot spots covered.


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