Interested in investing in technology? Here’s a breakdown of why the sector is so important for investors.
The evolution of technology has certainly garnered the interest of the general public and investors alike as tech innovation continues to move forward at a remarkable speed.
Overall, the sector has come a long way in the last two decades: in March 2000, the S&P 500 technology index hit its peak of 988.49 points, rising by almost 500 points in the five years leading up to the dotcom bubble. Similarly, the NASDAQ reached all-time highs of 5000 points during this milestone time period.
Almost 20 years later, the technology market can returned to dominate markets with FAANG — Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOG) — stock creating vast monopolies and nearly unmatched market share in their given markets.
With so much growth in the tech sector over the last two decades, tech developments disrupt and shape our cultural fabric at unprecedented speeds. Industries such as finance, real estate, ride-hailing and healthcare are transforming with current technological advancements.
Here, Investing News Network (INN) breaks down the answers to the question you might be asking yourself: “What is technology investing?” INN also explains why investors should be interested.
What is technology investing? Evolution of tech
The past decade or so has seen the evolution of countless industries. Take, for example, the music industry, which has gone from vinyl to cassette to compact discs, and now there is streaming. The most notable streaming company emerging from this trend has been Spotify (NYSE:SPOT), which made its debut on the NYSE in 2018. The streaming platform is used by over 207 million individuals worldwide.
In addition, the cable industry has been shaken up. The video streaming company Netflix (NASDAQ:NFLX) has already expanded to over 190 countries worldwide. In turn, Amazon’s streaming services have exploded in recent years. Global Amazon Prime video streaming subscribers are projected to reach 46.3 million by 2020 according to Statista.
Another segment of tech that has witnessed growth over the last 10 years is messaging apps, connecting people to various countries around the world. WhatsApp, the world’s largest messaging app, boasts over 1.5 billion users.
Speaking of connectivity and the future, the fourth industrial revolution has been tied to various sectors of technology from artificial intelligence (AI) to 3D printing. Countries like India are banking on Industry 4.0 to aid in growth optimization and improving supply chain efficiencies in enterprise.
Blockchain has also garnered interest in the tech sector; the global market size is set to grow from US$708 million in 2017 to US$60.7 billion in 2024. According to the Stanford Centre for Blockchain Research, blockchain has the potential to transform payment systems such as clearing and settlement, which are valued at over US$12.6 trillion in the US.
“This market segment previously has been held back in part by the outdated aspects of the mainframe computing technology. Blockchain is spurred by more modern ways to manage global transactions across national borders from IBM (NASDAQ:IBM), Microsoft (NASDAQ:MSFT), and Accenture (NYSE:ACN),” according to the Markets Report Center.
In addition, mobile advancements and smartphones ranked at the forefront of innovation among participants surveyed, according to a report by Adobe (NASDAQ:ADBE). According to Statista, by 2021 the number of smartphones is projected to reach 3.8 billion worldwide.
The esports industry is also making significant headways, as it boasts projected 2019 revenue reaching US$152.1 billion worldwide, according to Newzoo. The burgeoning industry has over 454 million viewers worldwide, with games including Dota 2, Fortnite, League of Legends and Counter Strike: Global Offensive awarding millions in esports prize money. The majority of the esports industry is currently run by a handful of the largest production companies including Tencent Holdings (HKEX:0700), Activision Blizzard (NASDAQ:ATVI) and Take-Two Interactive (NASDAQ:TTWO).
What is technology investing? Market growth
When looking at the scale of the technology market worldwide, its reach remains almost untouchable. According to a report from Apptio, the global technology economy is now the world’s third largest economy, surpassed only by the US and China.
A report from research firm Gartner states that technology spending worldwide is anticipated to reach US$3.88 trillion in 2019, rising 3.2 percent from 2018. This is projected to be driven by spending on enterprise software, IT services and data centre systems leading the way.
In response to the massive global trend in spending in this sector, the World Economic Forum (WEF) has proposed that countries invest in cybersecurity infrastructure in order to mitigate risks on its digital and connected systems. For example, it cites that an attack on the US grid system could cost US$1 trillion in damages.
“Fast-paced investment in IoT has brought the industry to an inflection point,” said Karime Kuri Tiscareno, project lead of Internet of Things at the WEF. The WEF recommends that companies create broader security awareness, integrate proactive security systems and balance priorities as technology becomes continually embedded into their operations.
What is technology investing? Future outlook
McKinsey Global Institute highlights that the Internet of Things (IoT) market could impact several industries such as manufacturing, oil & gas, public sectors and healthcare. IoT data still largely remains unanalyzed, while the potential for IoT and decision-making could add significant value to enterprises.
For example, the IoT industry is projected to reach 75.4 billion devices by 2025, Forbes reported, and its economic impact is projected to be vast. McKinsey anticipates that the IoT industry will have a US$11.1 trillion global impact.
The evolution of AI is also projected to influence and shape society. Despite exciting and profound advancements in natural language processing and prediction, its adoption still remains slow. In 2018, only 5 percent of surveyed businesses significantly integrated AI into their operations, the Economist reported. In spite of this, the publication noted that 55 percent of supply chain executives plan to invest in AI in the 12 months following the survey.
PwC, in its technology outlook, has predicted eight verticals that the firm thinks would disrupt business: AI, augmented/virtual reality, blockchain, drones, IoT, robots, 3D printing and autonomous vehicles.
Each of these verticals are set to see a massive return in revenue, with AI hitting US$60 billion by 2025, up from US$1.37 billion in 2016.
What is technology investing? Ways to invest
Within the broad scope and magnitude of the tech industry, there are a number of ways investors can gain exposure to the transformative disruptive technologies.
Exchange-traded funds (ETFs) provide a basket of securities that offer a popular and often inexpensive method for investing. Here’s a brief overview of few technology ETFs for investor consideration:
- Shares US Technology ETF (NYSEARCA:IYW): The ETF began on November 12, 2001, and currently has 149 holdings. It covers all the big names of technology including Microsoft, Apple, Facebook and Alphabet.
- Technology Select Sector SPDR (NYSEARCA:XLK): This fund is one of the largest in the sector, with net assets of US$82.78 billion. There are 67 holdings in this fund, which was started on December 16, 1998. Just like iShares, this fund has all the major names in the industry including Visa (NYSE:V), Mastercard (NYSE:MA), Cisco (NASDAQ:CSCO), Intel (NASDAQ:INTC) along with Apple, Microsoft and Alphabet.
- iShares Global Tech ETF (NYSEARCA:IXN): Unlike the US iShare ETF, this fund focuses on technology companies from around the world. Founded in 2001, the fund provides exposure to Japan, Korea, Taiwan and Germany, in addition to a 79 percent exposure to US companies. Its international holdings include Samsung Electronics (KRX:005930) and Taiwan Semiconductor Manufacturing Company (TW:2330).
For investors looking to put money into the technology sector, there are a number of options, including large cap technology stocks as well as artificial intelligence, robotics, esports, virtual reality and blockchain stocks.
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This is an update to an article originally published in 2016.
Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.