Sector Investing: Evolving and Converging
It was always a big deal to me. And I imagine I’m not alone in feeling this way. The smile that comes across my face when I think about it is much easier than finding the right words. I’ll put it like this: going to work with my dad when I was a kid was just—cool. I loved seeing him in his element with his coworkers, calling the shots, running meetings, and keeping that place hopping. They’re memories that I keep close.
I happened to catch a report1 recently that brought me back to those days, in particular a work trip my Dad took me on when I was about 12.
It also furthered my take on a shifting investment paradigm that I’ve been thinking quite a bit about recently.
Traditionally, you wouldn’t think t-shirts and, say, brake pads have much in common. But finding common ground between the two, and other seemingly disparate industries, isn’t that much of a stretch today. The likes of Wayakama Japan’s Shima Seiki Manufacturing Ltd2 certainly help the cause.
Shima Seiki specializes in advanced, whole-garment knitting machines that allow apparel makers to make clothing without seams in minutes, rather than hours or days. To be sure, the specs on the systems involved in making clothing from scratch read more NASA-like than what you would find on your typical Singer sewing machine. Not satisfied with potentially revolutionizing textiles production, though, Shima Seiki is reportedly looking to apply its expertise and penetrate the auto industry by developing lighter, non-steel auto parts.
One company with the potential to disrupt two industries at the opposite ends of the production spectrum makes for a couple of interesting thoughts.
It has me thinking that maybe we’re headed to a world where the traditional sectors we’ve become accustomed to may eventually become less relevant. It also has me thinking that the great equalizer across all industries is technology, and that we may be headed toward the day when the majority of firms can be thought of as technology companies.
Tech has become something of a central nervous system that connects us all, driven by the need to incorporate intelligent solutions that streamline myriad operations and allow us to compete in the broader market.
The days where companies fit neatly into a specific sector and each sector is distinct appear numbered, with technology-aided interconnectivity blurring the lines. Take Amazon3 as an example. Does it fall cleanly into the consumer category? Or, at its core, is it really a technology company in disguise? Does it even matter?
Sector investing is inherently fun—much more fun than investing by style boxes. One reason is that sectors have been largely stable historically. Individual companies rarely get reclassified into a new sector and the sectors themselves are rarely created, removed, or meaningfully changed.4 This brings a touch of certainty to investing, which is always appreciated. But now it seems we’re increasingly looking toward those companies that are able to adapt to burgeoning technologies, the full scope of which no one can be quite sure of yet.
One of the real potential advantages of sector investing, though, comes when sectors like Health Care and Materials, or Consumer Staples and Information Technology, are combined. The varied nature of the businesses of the constituent industries suggests price correlations would be low. Add Consumer Staples stocks to a portfolio of technology-related stocks and investors can diversify their risk.
Now the story could be getting slightly more complicated. In the future, sector investing may be less clear cut as companies cross the typical sector divide.
Far into the future
That’s not one of Wall Street’s strengths, though. The street is somewhat nearsighted—it’s typically over consumed with near-term performance, and prefers black and white distinctions. Even though a stock price represents the present value of future earnings, the future that analysts care about can sometimes only be as far as the next quarter. Often companies are compared to their ‘peers’ in an industry, even if a revolutionary company has no peers.
We believe the true value of technology is well beyond the next quarter. It could be miles ahead. Think of it in these terms: Maybe the end product isn’t even the product anymore, no matter the industry, whether apparel, or auto, or health care. That t-shirt is almost past tense before it hits the shelves. Maybe the real product, and the real investment value, is the technological intelligence that will help cultivate what’s “next.”
On our end, we’ve developed a number of investment vehicles designed to identify those players capable of leveraging the technologies that are becoming ubiquitous, and those that figure that continue to do so down the line as they develop:
- Global X FinTech ETF (FINX) invests in companies in the emerging financial technology sector, which could include a range of innovations helping to transform established industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions.
- Global X Internet of Things ETF (SNSR) invests in companies positioned to 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.
- Global X Robotics & Artificial Intelligence ETF (BOTZ) invests in companies positioned to benefit from increased use of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles.
- The Global X Lithium & Battery Tech ETF (LIT) invests in the full lithium cycle, from mining and refining the metal, battery production.
My dad was in the textiles business. And that trip we took was to one of his company’s factories down south. It was a little kid’s dream, really. In between burgers, pizza, and ice cream on the open road, Dad took me around the factory and showed me how a t-shirt was made in the early 1980s. From start to finish, Dad’s company bought the yarn, shipped it to the factory, and spun it into fabric on the looms. Once made, the fabric went to the dye room and the cutting room thereafter, where machines cut the patterns and a team of seamstresses stitched the t-shirt together.
Everything happened in that one factory in Mississippi. Today, the process is entirely different, from start to finish. Technology has streamlined processes and taken such efforts and made them global in scope, from the initial concept to final delivery.
This global concept will be the next story I share. Here, the takeaway for investors is that technology is not only the great differentiator for companies, it’s also the great equalizer across sectors. It’s the tie that’s binding everything in its sight.