How To Invest In Emerging Technologies Of The Future With ETFs

It is hard to deny that the world is driven by technology. And while computers, cell phones, and the internet have become common place, there are plenty of other sectors that are just on the cusp of breaking out and becoming extremely important industries.

And while we have all heard of the niche industries outlined below, you may not have known that you can easily invest in all of them with ETFs. This approach also helps to lower risk levels by spreading out assets, and it ensures that you don’t have to worry about picking which companies will soar and avoiding those that fall by the wayside.

Below, I’ll briefly highlight a few exciting long-term trends in the technology world and corresponding ETFs to play them. These selections are perfect for investors who not only have a long time horizon, but have a high risk tolerance as well. All could see high levels of volatility, but given some of the broad trends in the space, it seems very likely that the group will move to the forefront of the technology world over the next few years.

Cyber Security
I am sure we can all think of a recent hacking scandal that has targeted a financial institution, movie studio or retail store over the past few months. And as more and more data goes online and into computers the need to secure this information will increase if only to prevent some of the recent public relations disasters from happening again.

This market has really exploded in just the past decade, moving from a niche industry to something that every company needs to consider. In fact, some analysts expect the market to grow at a compound annual growth rate of over 10% until the end of the decade, reaching a value of over $150 billion.

And as the sector grows in importance, we could see plenty of merger and acquisition activity too. A wave here similar to what we have seen in the pharma industry isn’t out of the question, as larger companies move to expand their offerings and give consumers and businesses more of a one-stop shop for cyber security issues.

How to Play? PureFunds ISE Cyber Security ETF (NYSEARCA:HACK)
Although many new ETFs struggle to amass assets in a timely manner, this certainly hasn’t been the case for HACK. The fund was launched in November of 2014 and it is already one of the more popular ETFs in the tech space and closing in on the half a billion asset level.
The fund follows the ISE Cyber Security Index, giving exposure to about 30 companies in the up-and-coming space. Firms included either have to be in the cyber security infrastructure or service segments, though there is a heavy focus on infrastructure-related companies. The fund does take a modified equal weight approach, so no single company is going to dominate the risk/return profile of the benchmark.
Current holdings are focused on system software companies, followed by communications equipment, and the application software. American firms do dominate the index at about 75% of the total, though Israel receives a decent allocation as well.
Many of the companies in the portfolio aren’t really household names just yet, but that is sort of the point of the ETF. Firms like Infoblox (NYSE:BLOX) and CyberArk (NASDAQ:CYBR) are in the top ten, but larger companies like Cisco (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR) also make their way into the fund too so there is a decent mix between large and small.
There are really no other options out there for direct targeted exposure to the entire cyber security sector, making HACK a tough fund to beat. But given all the high profile hacking events lately and the strong demand for cyber security services, one has to believe that this segment will be a long-term winner.

Clean Technology
As technology continues to improve, the importance of clean energy will only grow. Many types of clean energy are now reaching cost parity with traditional fossil fuels and adoption is really starting to pick up as a result.
The best part about clean energy, though, is that it really has just begun to make a dent in the total energy usage map. By some estimates, it only makes up 20% of the total, and if you strip out hydro, it falls to under 5% suggesting a massive opportunity.
In fact, renewable power (excluding hydro) could account for as much as 8% of the total by 2018, basically a doubling of usage in just a few short years. And with governments, and increasingly consumers as well, pushing for this type of energy it isn’t an area that I would want to bet against for the long term.

How to Play? First Trust NASDAQ Clean Edge Green Energy Index ETF (NASDAQ:QCLN)
This is a very interesting ETF to play the rising demand for alternative energy and clean technology, and it is a bit different than what investors see in many other names in the space. In most of the other products in the clean energy world, the focus will be on a specific segment like solar or wind, or even sometimes broad holdings across various types of energy.
QCLN, however, takes a unique approach combining plays on solar and wind, as well as companies that produce clean technology as well as those that benefit from a clean tech environment. This results in a portfolio that includes companies in the consumer sector (such as Tesla (NASDAQ:TSLA)) and even companies like Cree (NASDAQ:CREE) for tech, expanding the fund’s reach beyond the traditional semiconductor which is where many solar companies are currently found.
The portfolio right now consists of about 50 companies and a modified market cap weighted system to ensure that big companies receive larger weights but do not completely dominate the index. The fund is a bit on the pricey side – 0.60% – but it does offer up exposure that isn’t really available anywhere else in the market right now.
And the holdings profile is the real selling point for this ETF as it is quite diversified from a sector perspective, something you usually don’t get in the clean energy space. Technology makes up nearly 40%, energy accounts for roughly 24%, and industrials round out the top three sectors at 18%.
But given the broad scope of this fund, it may be the best choice to play the clean technology trend. You really don’t get this type of exposure anywhere else in the ETF world right now, and if you believe in the promise of the clean energy boom over the long haul, this will be a tough ETF to beat.

Cloud Computing
Cloud computing has especially been in the news lately thanks to rumors of a buyout of Salesforce.com (NYSE:CRM). But even beyond that, cloud computing has been surging in importance as more services go to the cloud allowing for more centralization of services and cheaper storage options.
Clearly, mergers and acquisitions are a big reason to be in this space as apparently not even the giants of the sector are safe from takeover possibilities. But the space is growing organically too, with recent research suggesting a compound annual

How to Play? First Trust ISE Cloud Computing Index ETF (NASDAQ:SKYY)

This up-and-coming sector, though small, has an ETF tracking it that comes to us from First Trust. This fund tracks the ISE Cloud Computing Index giving exposure to about 40 companies in the space, while charging 60 basis points a year in fees for the service.
Since cloud computing is relatively new, the index methodology is pretty complicated. Pure play cloud computing companies, non-pure play, and technology conglomerate companies are included in the benchmark, though non-pure play firms have a cap and just 10% of the index can go to technology conglomerate firms which operate in the cloud computing space.
The portfolio has a tilt towards software and internet companies, though technology hardware and IT service firms also make the cut. And while there are several big names in the fund, including Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), a few of the smaller companies also find their way into the product, including Brightcove (NASDAQ:BCOV) and Informatica (NASDAQ:INFA).
And while the volume levels aren’t high for this fund, it is important to remember that ETFs have some different trading considerations than stocks. ETF liquidity is usually derived from the underlying holdings, and the portfolio here is very easy to trade. Plus, current bid/ask spreads are just a few cents wide so there are little in added costs for this ETF despite its low trading.
So if you are looking to tap into the cloud, SKYY may be the best bet. It is one of the most concentrated plays on the space and given the strong demand for cloud computing, it could be a great long term choice.

Broad: iShares Exponential Technologies ETF (NYSEARCA:XT)
If you can’t decide where to put your money in the emerging tech sector, consider this relatively new fund from iShares. The ETF isn’t even one quarter old but it has already managed to amass more than $600 million in assets so clearly there is something to its strategy.
The fund’s focus is on the Morningstar Exponential Technologies Index, holding about 200 companies in total and charging investors 47 basis points a year in fees for exposure. The idea here is to focus on companies that are innovation leaders, span across market sectors, and are focused in on both producers and users of transformative technologies.
As you might guess, this fund has the biggest weight in the technology sector with this segment accounting for nearly one third of the total exposure. However, health care makes a sizable allocation too at about 29%, while telecoms and industrials also receive double digit holdings too.
In terms of some of the companies in the fund, there is a wide range though topics like robotics, 3-D printing, nanotechnology, big data and bioinformatics are among those that are included. In general though, companies are creating/producing one of the new age technologies and are using another making them extremely exposure to some of the current market trends. Again, this fund is pretty much brand new so there is little in terms of performance history. However, if you are looking for a broad play that stretches across sectors, this fund may be tough to beat for long-term investors.
Bottom Line
Any of the above sectors look to be huge, and an important part of the economy in the years to come. However, all look to be quite volatile and especially so given that many of the segments highlighted above are devoid of true dominant players suggesting that a shakeout is ahead for many companies in these markets.
Fortunately for investors though, you don’t have to try and cherry pick what may or may not be the best company in the space. Instead, you can ride the positive trends with ETFs at a much lower risk level and ensure that you get all of the top companies in what look to be very promising industries for the future.

Trove

 

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Posted by on May 13 2015. Filed under Environment. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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