Disrupt Or Be Disrupted: How This Business Mantra Applies To Investing

From the phenomenal growth of the wildly popular ARK exchange-traded funds (ETFs) to the sensational news surrounding battleground stock Tesla, investing in disruptive technology is one of the hottest market trends of the past year. 

Breakthrough technological innovation, especially artificial intelligence (AI) and machine learning, has fueled the acceleration of other megatrends like sustainability. In the words of Klaus Schwab, Founder of the World Economic Forum (WEF): “We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another.”

What is disruptive technology?

Popularised by scholar Clayton Christensen, the term “disruptive technology” refers to innovations that significantly change an existing industry, product, or service and/or create an entirely new one. Recent disruptive technology examples include the Internet of Things (IoT), cloud computing, fintech and 3D printing. The automobile, electricity service, and television were also once disruptive technologies in their own times. 

Disruptive technologies alter the way that consumers, industries and businesses operate. For customers, these changes typically translate to decreased costs, improved user experience, and access to products and services that were previously reserved for a specific target segment. Disruptive technologies have also opened up new ways for businesses to deliver services and interact with customers.

Why disruptive technologies? 

Investing in disruptive technologies carries significant risk as they can take years to be adopted by consumers or businesses. That said, disruptive technology stocks and funds are often touted for their high returns precisely because of their higher risk.

However, investors should not discount the disruptive technology theme for its growth potential in the long-term. Technology is advancing at a rapid rate and investors not exposed to tomorrow’s front runners risk being left behind by a fast-changing world. As illustrated by the infographic below, today’s business leaders may become obsolete at the turn of the next decade.

With that in mind, investors should consider disruptive technologies to future-proof their portfolios, if not for their attractive returns. 

A better way to approach disruptive technology

Investing in disruptive technology is notoriously difficult with the risks it entails. Investors have to do their homework to accurately pinpoint which technology will drive the next big wave of disruption, find reasonably priced opportunities and monitor their investments consistently. For those who don’t have the time to analyse individual stocks, ETFs provide broad exposure to a basket of securities that span multiple trends and innovations.

The Syfe Select Disruptive Technology portfolio is a ready-made portfolio of such ETFs that is similarly positioned to many disruptive innovation funds in the market. The portfolio invests in companies at the leading edge of technologies and trends that are reshaping the future such as AI, robotics, cloud computing, fintech, esports, online retail, cybersecurity and more.

In order to manage risk, the Disruptive Technology portfolio is globally diversified across developed and emerging markets. Keeping in mind the ever-changing nature of disruptive technologies, emerging innovation themes are also actively monitored for possible inclusion. 

We take a closer look at underlying portfolio holdings at the forefront of these technological trends.

Harnessing the robot revolution: BOTZ 

We are on the cusp of a paradigm shift where robotics and AI play an increasingly important role in our daily lives. From robotic automation in the industrial space to unmanned vehicles and drones, the robot revolution has disrupted and transformed multiple industries. 

The Global X Robotics & Artificial Intelligence ETF (BOTZ) is a targeted play in this sector, investing in an index of companies that stand to gain from the increased adoption of automation, robotics and AI. The fund has performed well with an annualised return of 16.2% over the past three years, as of 30 July 2021.

Top 10 holdings, BOTZ, as of 2 August 2021

Although there is a heavy focus on the industrials and information technology sectors, BOTZ also provides exposure to the health care, financials and consumer discretionary sector. 

The evolution of the Internet: ARKW and KWEB

Although the internet is no longer considered a disruptive technology, it is host to many disruptive innovations of today such as cloud computing, big data, blockchain technology and IoT. Therefore, investing in internet-based companies gives investors a certain degree of exposure to multiple disruptive technologies that will define the future.

The ARK Next Generation Internet ETF (ARKW) is one ETF that provides broad, multi-cap exposure to these “Next Generation Internet” stocks. Examples include big names like Tesla Inc and Twitter Inc.

Top 10 holdings, ARKW, as of 4 August 2021

ARKW is the largest fund in our Disruptive Technology thematic portfolio, with total net assets of US$6.35 billion at this time of writing. 

The ETF posted a striking annualised return of 45.4% in the past three years (as of 30 July 2021) and the trend is likely to continue despite reopening-related pullbacks. Particularly, companies like Zoom and Shopify were already growing significantly prior to the pandemic. 

While ARKW has a geographical focus on the US, the KraneShares CSI China Internet ETF (KWEB) can be said to be its Chinese equivalent. KWEB invests primarily in Internet and Internet-related companies based in China and Hong Kong. Investors will recognise industry leaders like Tencent Holdings Ltd, Alibaba Group Holding Ltd and JD.com Inc amongst KWEB’s top holdings. 

Top 10 holdings, KWEB, as of 3 August 2021

Companies held by KWEB will also benefit from China’s fast-growing internet user population and the increasing domestic consumption by China’s growing middle class. As of 30 July 2021, the annualised return for the last three years is -2.1%.

Finishing strong in fintech: ARKF

Technology has fundamentally changed the ability of financial institutions to interact with customers and conduct transactions. According to a joint study by the WEF and Deloitte, fintechs have defined the direction, shape and pace of innovation across almost every sub-sector of financial services. 

The ARK Fintech Innovation ETF (ARKF) capitalises on this megatrend. ARKF is an actively-managed ETF that provides exposure to fintech innovations including mobile payments, digital wallets, peer-to-peer lending, blockchain technology, and risk transformation. Investors of the fund are exposed to top names in the fintech scene like Square Inc, Shopify Inc, PayPal Holdings Inc and Coinbase Global Inc

Top 10 holdings, ARKF, as of 4 August 2021

As of 30 July 2021, ARKF has delivered annualised return of 40.3% over the past year and 2% year-to-date.

The fund also has a global geographical mandate which helps in diversification. Other than US-based companies, ARKF has significant holdings in China, Canada, Taiwan and Argentina. 

More than fun and games: ESPO

Gaming has become a serious business. According to data from Statista, it is estimated that the global gaming market will amount to US$268.8 billion annually in 2025. The Vaneck Vectors Video Gaming & eSports UCITS ETF (ESPO) invests in companies involved in video game development, eSports, and related hardware and software. To paint a sharper picture of the ETF, its top holdings include Nintendo Co Ltd and Tencent Holdings Ltd

Top 10 holdings, ESPO, as of 30 June 2021

ESPO has generated an annualised return of 20.3% in the past year (as of 30 July 2021), likely due to the stay-at-home trend accelerated by the pandemic.  

Local investors don’t have to look far to validate the performance of ESPO’s holdings. Homegrown company Sea Ltd is amongst ESPO’s top holdings and saw its revenue surge 101% to US$4.4 billion last year.

Empowering the future: CLOU

It is estimated that 80% of the technologies that will change the way we live and work are cloud-based. This forecast comes from the WEF, which also predicts that the value of cloud computing will grow to US$623 billion by 2025. 

As such, we include the Global X Cloud Computing ETF (CLOU) in our Disruptive Technology thematic portfolio. CLOU invests in companies involved in cloud-based computing, including firms that offer 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. It is one of few ETFs that offer targeted exposure to cloud computing. 

Other than capturing the opportunity of the cloud, CLOU offers diversification through integrating a mix of market caps operating within the cloud computing niche. This means that instead of having giants like Microsoft and Amazon swamp the portfolio, names like Dropbox Inc and Zoom Video Communications Inc make up its top holdings. 

Top 10 holdings, CLOU, as of 2 August 2021

As of 30 July 2021, CLOU has returned an encouraging 26.1% over the past year. 

Protecting the cyberspace: CIBR

With the rise of disruptive technologies comes the rise in cybersecurity threats. This makes cybersecurity an essential component to the continuity of the disruptive technologies, and one of the most durable disruptive growth themes. 

The First Trust NASDAQ Cybersecurity ETF (CIBR) helps investors access this theme. It tracks companies involved in the building, implementation, and management of security protocols, providing protection to data and network operations. For example, Okta Inc helps companies manage and secure user authentication into applications.

Top 10 holdings, CIBR, as of 3 August 2021

As of 30 July 2021, CIBR has generated three-year annualised returns of 24.3%.

Staying ahead of the curve: IPO

The essence of disruptive technology is the rapid pace in which new solutions are built on top of existing innovations. One way to stay ahead of trends is to invest in the latest initial public offerings (IPOs). 

The Renaissance IPO ETF (IPO) invests in newly public US-listed companies, months before they are included in core equity indices like the S&P 500. In order to not miss the next Google or Facebook, IPO adds sizable new companies to its portfolio on a fast entry basis. 

Notably, the fund’s top holdings are also able to take advantage of the disruptive technology trends discussed earlier. For instance Snowflake Inc specialises in cloud computing-based data warehousing and Palantir Technologies Inc is involved in big data analytics.

Top 10 holdings, IPO, as of 2 August 2021

Given its ability to track the fast-moving IPO market, IPO has generated a noteworthy 28.9% in annualised returns over the last three years (as of 30 July 2021) and outperformed the S&P 500. 

Source: Renaissance Capital

Easing into disruption

Though exciting, investing in disruptive technology can be intimidating. As a word of caution, investors should have an already well-diversified portfolio before investing in disruptive technology due to its risky nature. 

Syfe’s Disruptive Technology portfolio is one way to ease into the megatrend. With eight ETFs representing different branches of the broader disruptive technology theme in fairly equal allocations, investors can worry less about the volatility of specific ETFs. 

With no minimum investment, no lock-in periods and no brokerage fees, you can start where you’re comfortable. As an added advantage, we’ll fully manage your portfolio with free dividend reinvestment and automatic rebalancing, for fees as low as 0.35% per annum. If you’re looking to ride the wave of disruption in a more controlled manner, consider the Syfe Select Disruptive Technology portfolio!