We've all encountered the client who wants the portfolio to reflect the world of tomorrow. They crave the thrill of watching the future unfold in real time like it did in the dot-com boom.
Those who were around then remember an era of accelerated and wide-reaching innovation. The Internet was still being built out. Consumer applications were far from ubiquitous.
And the companies at the leading edge were still relatively small. Valuations were speculative, reflecting a lot of hope and confidence in new technologies and new markets.
Before the iPhone, Apple was doing fine. The iPod had turned it around. But it was still only a $100 billion company.
Here in the $1.6 trillion zone, shareholders have had a fantastic run. Maybe Apple and its peers can keep pushing the limit. But will they change the world, much less grow another 15-fold in the foreseeable future?
I often talk to retail investors who get excited about some emerging technology like artificial intelligence, blockchain, cloud computing, autonomous cars or the Internet Of Things. They want to get in on the ground floor.
The conversation often hits a wall: sooner or later one or more of the Silicon Valley giants will absorb the most promising independent players in any given theme, so unless you're extremely focused, it's easier to just hold your FANG shares and wait for the acquisition announcement.
The problem there, of course, is that when an entrenched market leader absorbs the most promising small-cap competitors, even truly revolutionary tech gets lost in the new parent's massive scale. And investors who want the thrill of capturing a hyper-growth story feel cheated when the trillion-dollar needle simply doesn't move.
That's why the new wave of thematic index funds are so interesting. Take Global X Robotics & Artificial Intelligence ETF (BOTZ), for example. Maybe your instincts as an investment professional tell you that this is where the Apple or Microsoft of tomorrow will be born, or maybe your clients are hungry for a sustainable growth profile that resembles what Apple and Microsoft have achieved historically.
After all, these are still relatively new and exotic technologies. People with their eye on the ball say the world's factories will need to adopt fresh paradigms in order to operate efficiently and sustainably . . . especially in a pandemic environment. A new industrial revolution could be underway in generations to come.
We're truly on the ground floor in that scenario, but none of the Big Tech giants present a pure play. Most of the most interesting contenders are overseas. And broad sector funds are weighted to practically exclude the real high-impact opportunities.
Compare BOTZ to a sector-level technology fund like XLK. At best, XLK provides maybe 4%-5% exposure to the theme via a few key holdings like NVIDIA. Instead, the tyranny of broad weighting ensures that most of an investor's money actually goes to Apple, Microsoft and other legacy stocks.
And many of the stocks in BOTZ wouldn't fit in XLK no matter how big they are. A lot of the innovation in this field is happening in Switzerland and Japan. If they end up dominating this industry, someone who stuck with the XLK would miss the victory lap.
That's important to highlight as we start our deep dive into some of the biggest technologies of tomorrow and how investors can get pure-play exposure. Every emerging trend has its losers as well as its winners . . . the Big Tech giants of today are simply the dot-com upstarts that survived that cycle and reaped the rewards.
But the odds are good that as long as the theme delivers on its potential, the ultimate winners will show up on narrowly focused indices and make long-term investors happy.