- Equity sectors themselves have rarely changed, but the composition of companies within each sector evolves over time as we transition from one economic era to the next
- We believe that we are in the early stages of a period of significant disruption, given rapid advancements in technology and changing demographics and consumer preferences
- Rather than waiting for traditional sector funds to evolve to these new paradigms, investors can potentially pre-empt these changes by targeting Sector Disruptors: thematic ETFs invest in companies that are well-positioned to be a step ahead of the status quo by developing transformational technologies or catering to a rising consumer base
At first glance, equity sectors appear to be relatively consistent over time. While the economy evolves, Consumer Discretionary companies are always there to help us spend our disposable income. Energy firms are always there to fuel our vehicles to get us from point A to point B. In fact, in recent history, there have been only two major changes to the Global Industry Classification Standard (GICS). In 2016, Real Estate was broken out as a distinct sector from Financials. In 2018, the Telecommunications sector was overhauled and renamed “Communications Services.” The refreshed sector now consists of stocks from the former Telecoms sector, in addition to Information Technology and Consumer Discretionary. The relative constancy of sectors over time can be valuable to investors looking to manage macro-level risks and correlations.
Yet within each sector, change is unending. As powerful structural themes emerge, one era gives way to the next, and former sector bellwethers are often left behind. The desktop computer giants of the 1990’s, like Dell and Compaq, were ultimately replaced by the mobile device makers and social media companies of the 2010’s, like Apple and Facebook. This is part of natural economic Darwinism. Comparing major sector indexes to their compositions 20 years ago shows just how much sectors can organically change over time. The 2018 composition of the sector indexes referenced in the following graph on the next page bear little resemblance to their 1998 iterations, with each sharing less than half in overlap to their older selves.
While turnover at the sector level occurs naturally over time, we believe we are in the early stages of a major period of sector-level disruption, given rapid advancements in technology and changing consumer preferences. Falling computing costs, the rise of artificial intelligence, and greater connectivity are dramatically changing how companies operate, and the products that they sell. Similarly powerful themes are stemming from changing consumer habits, as a new generation of spenders reach peak earning years, yet spend their money differently than generations before them. As a result of these emerging themes, the sector bellwethers of today look increasingly at risk of being replaced by companies positioning for the next paradigm.
While many investors may be looking to potentially benefit from these paradigm shifts, we believe traditional sector funds are ill-equipped to help investors do so. The traditional sectors tend to favor the winners of the past, tilting exposure to the firms that have already successfully capitalized on a specific economic paradigm. As the powerful macro-level themes mentioned above begin to accelerate, a new set of companies are likely to eventually rise to the top of each sector. Rather than waiting for traditional sector funds to cycle out of the old guard of companies in favor of new leaders, we believe investors can potentially pre-empt these changes by targeting Sector Disruptors: thematic ETFs that invest in companies that are well-positioned to be a step ahead of the status quo in developing revolutionary technologies or catering to a rising consumer base.
HERO: The Global X Video Games & Esports ETF seeks to invest in companies that develop or publish video games, facilitate the streaming and distribution of video gaming or esports content, own and operate within competitive esports leagues, or produce hardware used in video games and esports, including augmented and virtual reality.
BUG: The Global X Cybersecurity ETF seeks to invest in companies that stand to potentially benefit from the increased adoption of cybersecurity technology, such as those whose principal business is in the development and management of security protocols preventing intrusion and attacks to systems, networks, applications, computers, and mobile devices.
CLOU: The Global X Cloud Computing ETF seeks to invest in companies positioned to benefit from the increased adoption of cloud computing technology, including companies whose principal business is in offering computing Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), Infrastructure-as-a-Service (IaaS), managed server storage space and data center real estate investment trusts, and/or cloud and edge computing infrastructure and hardware.
GNOM: The Global X Genomics & Biotechnology ETF seeks to invest in companies that potentially stand to benefit from further advances in the field of genomic science, such as companies involved in gene editing, genomic sequencing, genetic medicine/therapy, computational genomics, and biotechnology.
DRIV: The Global X Autonomous & Electric Vehicles ETF seeks to invest in companies involved in the development of autonomous vehicle technology, electric vehicles (“EVs”), and EV components and materials. This includes companies involved in the development of autonomous vehicle software and hardware, as well as companies that produce EVs, EV components such as lithium batteries, and critical EV materials such as lithium and cobalt.
AIQ: The Global X Future Analytics Tech ETF seeks to invest in companies that potentially stand to benefit from the further development and utilization of artificial intelligence (AI) technology in their products and services, as well as in companies that provide hardware facilitating the use of AI for the analysis of big data.
MILN: The Global X Millennials Thematic ETF seeks to invest in companies that have a high likelihood of benefiting from the rising spending power and unique preferences of the U.S. Millennial generation.
LIT: The Global X Lithium & Battery Tech ETF invests in the full lithium cycle, from mining and refining the metal, through battery production.
FINX: The Global X FinTech ETF seeks to invest in companies on the leading edge of the emerging financial technology sector, which encompasses a range of innovations helping to transform established industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions.
BFIT: The Global X Health & Wellness Thematic ETF seeks to harness the effects of changing consumer lifestyles by investing in companies geared toward promoting physical activity and well-being.
BOTZ: The Global X Robotics & Artificial Intelligence ETF seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles.
SNSR: The Global X Internet of Things ETF seeks to invest in companies that stand to potentially benefit from the broader adoption of the Internet of Things (IoT). This includes the development and manufacturing of semiconductors and sensors, integrated products and solutions, and applications serving smart grids, smart homes, connected cars, and the industrial internet.
SOCL: The Global X Social Media ETF provides investors access to Social Media companies around the world.
LNGR: The Global X Longevity Thematic ETF seeks to invest in companies positioned to serve the world’s growing senior population through exposure to health care, pharmaceuticals, senior living facilities and other sectors that contribute to increasing lifespans and extending quality of life in advanced age.
EBIZ: The Global X E-commerce ETF seeks to invest in companies positioned to benefit from the increased adoption of E-commerce as a distribution model, including companies whose principal business is in operating E-commerce platforms, providing E-commerce software and services, and/or selling goods and services online.