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5 Rising Technology ETFs in 2019

Zacks Equity Research

The concept of artificial intelligence (AI) is likely to accelerate in the years to come. Global spending on AI is forecast to reach near $60 billion by 2021, attaining a compounded annual growth rate of about 50% from 2016-2021.

A few examples of AI and machine learning application include: suggesting movies for users—Netflix NFLX, recommend products for customers—Amazon AMZN, suggesting events for members— Facebook FB, self driving cars—Waymo and smart speaker and voice assistant—Google Home/ Amazon Echo. 

In 2019, flexible consumption models would continue to be a tailwind for AI and cloud computing adoption. As a part of their digital transformation initiatives, about 60% of the enterprises are expected to shift their IT systems to cloud.

Cloud Computing

Per research firm Gartner, organizations are moving toward cloud services rather than having their own server infrastructure and are renting software packages. Adoption of cloud services requires lower investments from companies.  As a result, Gartner expects global  IT spending to reach $3.8 trillion in 2019, an increase of 3.2% from the expected spending of $3.7 trillion in 2018.

Growing demand for cloud services point toward an exponential expansion of its value proposition: Everything-as-a-service (XaaS). Xaas is a cloud computing term used to describe an extensive variety of services and applications that can be accessed over the Internet on user demand as opposed to being utilized via on-premises means. The most common and successfully known example is software as a service (Saas).

Saas

SaaS is the primary driver for growth in all the software segments particularly in the Customer Relationship Management (CRM) arena where the focus is on providing quality customer experiences. Cloud software is forecast to grow at 22% in 2019 in comparison to 6% growth for all the other forms of software.

Xaas capabilities are allowing a broad range of users to access cutting edge technologies and services in an easier and cost-effective way. These include AI and Internet of thing (IoT) based solution.

IoT

IoT is the central part of many organizations’ digital transformation which allows for optimizing existing business models and excel at creating and pursuing exciting new models. The combination of AI, machine learning and contextually rich, real time data series delivered by IoT sensors and networks is going to grab eyeballs in 2019.

Also, the new Industrial IoT (IToT) platform is likely to be launched this year, which would help to solve the most difficult tasks faced by manufacturers, that of consolidating all the production systems into one data model.

Worldwide spending on IoT is expected to reach $1.2 trillion in 2022, achieving a CAGR of 13.6% from 2017-2022.

Blockchain

Antitrust and privacy concerns have garnered a lot of attention globally, with big tech giants being questioned for confidential data leak. To combat the same, investors could pay attention to the emerging blockchain technology. This provides a robust, incorruptible and encrypted method of record keeping that can be easily verified.

Possible Roadblocks

Signs of slowdown in global economic growth are a major concern. Also, with the new Congress just settling in, scrutiny of big tech-giants with regard to privacy and antitrust concerns could pose some issues ahead.

Further, France is working with other counties on a European Union wide digital tax on major tech giants like Apple APPL, Amazon, Facebook FB and Alphabet GOOGL. This would result in bigger tax bills (read: FAANGs See a Weak Start to 2019: More Pain Ahead for ETFs?).

ETFs in Focus

Recently released Fed minutes pointed toward a likely dovish stance to be adopted this year, this bodes well for the high growth sector. Also, Goldman Sachs expects the Internet stocks to outperform the broader markets in 2019.

Against this backdrop, we highlight the top-performing ETFs in the technology space in the year-to-date time frame (as of Jan 15). The constituent companies are known for the creation and adoption of emerging disruptive technologies in the market (see: all the technology ETFs here):

ARK Innovation ETF ARKK—Up 13.7% YTD

This is an actively managed ETF that includes companies that rely and/or benefit from innovations taking place in a wide variety of sectors. It comprises 36 holdings with Tesla Inc TSLA occupying the top spot with 7.9% weight. The fund’s AUM is $1.3 billion and expense ratio is 0.75%.

ARK Web x.0 ETF ARKW—Up 11.6% YTD

It is an actively managed ETF, comprising companies that develop, produce or enable: cloud computing & cyber security, e-commerce, big data & AI, mobile technology and IoT, social platforms and blockchain & Peer-to-Peer (P2P). It has 36 holdings with Square Inc SQ sitting at the top with a weight of 6.6%. The fund’s AUM is $429.2 million and expense ratio is 0.75% (read: Risk-On Trade is Back: ETFs That Gained the Most).

Amplify Transformational Data Sharing ETF BLOK—Up 8.0% YTD

It is an actively managed ETF that seeks to provide total return by investing at least 80% of its net assets in equity securities of companies actively involved in the development and utilization of blockchain technologies. The fund comprises 54 holdings. It has AUM of $102.8 million and expense ratio of 0.70%.

Global X Future Analytics Tech ETF AIQ—Up 7.9% YTD

The fund tracks the Indxx Artificial Intelligence & Big Data Index which is designed to provide exposure to exchange-listed companies in developed markets that are positioned to benefit from further development and implementation of artificial intelligence technology, as well as to companies that provide hardware facilitating the use of AI for the analysis of big data. The fund comprises 80 holdings with Salesforce.Com CRM occupying the top position with 3.5% weight. The fund’s AUM is $33.6 million and expense ratio is 0.68%.

SPDR S&P Software & Services ETF XSW—Up 7.6% YTD

The fund tracks the S&P Software & Services Select Industry Index which seeks to provide exposure to the software and services segment of the S&P TMI, which comprises the following sub-industries: Application Software, Data Processing & Outsourced Services, Home Entertainment Software, IT Consulting & Other Services, and Systems Software. It has 155 holdings. The fund’s AUM is $114.3 million and expense ratio is 0.35%. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: 10 Top-Ranked ETFs That Crushed the Market in 2018).

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