How Disruption Will Change Our Lives and Portfolios
Investors know that robotics and artificial intelligence (AI) are disrupting traditional paradigms. But they may be surprised by just how much disruptive technologies are impacting our daily lives.
I know that I was a little taken aback when I looked at my day. Typically, I wake up and check my smartphone to see what’s going on in the world through social media (SOCL). I get my caffeine fix via a Wi-Fi enabled coffee maker (SNSR). I pay the babysitter with my Venmo account (FINX). Before heading to the office, I plot the quickest route using an app (SNSR again). After I leave, my Roomba robotic vacuum pilots around my apartment cleaning my floors (BOTZ).
And this all before I dive into my day at Global X.
State of robotics: not like your father’s
As a parent, I try to be aware of what will frame my son’s conversations as he gets older. Sometimes I laugh about this when he shoos the Roomba away from our dog (Rufus is not a Roomba liking dog). For me, robotics emerging into our every day is like seeing “The Jetsons” come to life. When I was kid, the robot vacuum concept was limited to that futuristic, TV cartoon family.
For my son, though, a robotic vacuum is just part of a typical day. And as robots become more ubiquitous, I imagine when he is older he will think of Roomba as I do about our old family Hoover (which had a chord and required pushing, I might add).
It’s even conceivable he may never feel the need or have the opportunity to drive a car. Maybe he’ll be content opting to ride in an autonomous vehicles.
Technology is creating new trends for investors to track
However technology advances, a frequent goal for investors will continue to be to generate positive alpha (the difference between an investment’s return and that of the benchmark). But it’s important to remember that the script is going to change constantly, especially as technologies advance and evolve.
I believe that the new investment narratives on these technologies will include:
- Disruptive themes that drive “Conversational AlphaTM “(See below for more information on using Conversational Alpha™ to discuss disruptive themes)
- The vast economic potential of disruptive technologies
- How disruptors are changing the investment landscape
- How investors can implement disruptive themes in a portfolio
Using Conversational AlphaTM to discuss disruptive themes
While Alpha is the excess return of an investment relative to the return of a benchmark index, we believe by adding the word “conversational” to “alpha” you then democratize the meaning of “alpha” making it more relatable. We plan to use the term “conversational alpha” to better explain how an investment may add or subtract from returns in a relatable and consumable way. “Conversation Alpha” is the term that provides a launching ground for a basis of performance related discussion.
Powerful structural themes are changing the ‘how’ and ‘why’ behind our investment portfolios. Technology is pushing forward a period of natural economic Darwinism where new players are forcing former stalwarts to reinvent themselves, or risk fading away.
Still, the search for alpha remains constant. The challenge is determining what underlying market forces can make an investment alpha positive or negative, and how they can help us form the basis of a performance-related discussion with investors.
The vast economic potential of disruptive technologies
IHS Markit estimates that there were more than 27 billion connected devices, including computers, smartphones, and tablets, in 2017. In 2030, it expects that number to soar to more than 125 billion.1
The investment implications of that estimate are not insignificant. According to one projection artificial intelligence could contribute up to $15.7 trillion to the global economy in 2030, or more than the current output of China and India combined. Of that $15.7 trillion, it’s estimated $6.6 trillion would come from productivity gains and $9.1 trillion from consumption.2
Many market observers point to productivity and consumption as two of the bigger beneficiaries of AI and robotics, given the potential to automate operations and customize output to match demand. Those companies that are able to harness that information stand to have a significant competitive advantage over those slower to adapt.
How disruptors are changing the investment landscape
Embracing change can take time. By definition, a disruptor is something that interrupts the normal course. But as technology evolves, so too will businesses, consumers, and, of course, the market. What I find interesting is that we’re starting to see how technology has affected how the market aligns its deck chairs.
For their part, S&P and MSCI knew that they had to realign theirs, given the evolution in how people communicate and the channels through which they access information. Coming September 28, the Global Industry Classification Standard (GICS) structure will change.
Notably, the Telecommunication Service Sector will be broadened and renamed Communication Services to include companies that enable communication and distribute content, entertainment and otherwise. Google’s parent company Alphabet, Facebook, and Netflix will be grouped alongside traditional telecom players AT&T Inc and Verizon Communications. Twitter and Snap, both currently part of the Information Technology Sector, will also join.
How investors can implement disruptive themes in a portfolio
First, investors should look to pinpoint the structural shifts in the market, whether related to changing demographics, new consumer behaviors, or technological innovation. Second, they should find companies with exposure to the structural shift. Third, they need to consider the timing and whether the theme’s potential has been fully priced into the market yet.
But when looking to go thematic, a major benefit of ETFs is that they take care of the security selection step and provide access to a broad selection of companies with exposure to a particular theme. Conversational AlphaTM may also help provide context around the performance potential.
Simply looking at our days and seeing these structural shifts in action can be informative too when looking for thematic exposure. Consider my tech-disrupted morning routine, from smartphone, to coffee maker, payments, traffic patterns, and robotic vacuums—in ETF form, it might look something like this:
- The Global X Social Media ETF (SOCL) provides investors access to social media companies around the world.
- The Global X Internet of Things ETF (SNSR) seeks to invest in companies that stand to potentially benefit from the broader adoption of the Internet of Things (IoT).
- The Global X FinTech ETF (FINX) seeks to invest in companies on the leading edge of the emerging financial technology sector.
- The Global X Robotics & Artificial Intelligence ETF (BOTZ) seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence.
Significant structural shifts driven by disruptive technology are part of a new normal, both in daily life and when seeking alpha. And it appears likely that the Roomba terrorizing my dog now will likely pale in comparison to what my son’s futuristic robotic personal assistant will look like when he’s an adult. For investors, a key is understanding how exposure to that development could help them generate returns in their portfolio and how to properly implement in a risk-managed way.
For current holdings of the funds, please click on the fund name above.