The time to research stocks, the risks in identifying future “winners” and “losers”, sharemarket access and costs to purchase, as well as the ability to diversify adequately can be a challenge for investors when investing in megatrends. 

From this perspective, ETFs can be an efficient option, offering diversified exposure through one ASX trade. It can also be more cost-effective compared to purchasing companies individually and may allow investors access to specialist research from index providers, such as ROBO Global (an expert in identifying robotics, automation and AI companies).

Here are four megatrends to consider:

1.      Virtual connectivity and digitisation

The internet is an essential tool of modern life, required for business processes, data storage and even lifestyle improvements. It is estimated that by 2030, around 500 billion devices will be connected to the internet[1]. Subthemes within this include eCommerce, e-entertainment, robotics and data storage. There are a range of ETFs accessing this megatrend along with the subthemes in Australia depending on which area investors want to consider.

2.      Environmental resources and energy needs

Climate change is fuelling a transition to renewable energy. This transition is supported by the need for reliable and efficient battery technology. The supply chain extends from mining companies, mining for metals, to manufacturers of battery storage and storage technology providers. The market for battery technology is anticipated to reach US$190bn by 2026[2]. Exposure to this could come through sustainability or environmentally focused ETFs. Alternatively, ETFS Battery Tech & Lithium ETF (ASX: ACDC) is the only Australian-quoted ETF to focus specifically on battery technology.

3.      Growing Asian middle-class

The growth of the middle class across Asia is well documented and has implications for how and what people spend money on, with benefits to sectors such as education, healthcare and luxury goods. Investors considering this theme might look at particular sectors which are positioned for growth, or could focus on countries, like India, which are anticipated to see economic expansion in coming years. (see end of this story for more information on this trend).

4.      Biotechnology

Biotechnology specifically refers to technologies that use biological processes, capturing companies that focus on research, development, manufacturing and/or marketing of products based on biological and genetic information. The US biotechnology market is considered the centre of global biotechnology and is currently valued at US$1.2 trillion[3]. It will continue to grow, driven by the growing global population and the need for affordable, effective treatments and vaccines. Investors could look at broad sector investments in healthcare or biotechnology specific options such as ETFs S&P Biotech ETF (ASX: CURE).

Cost-effectiveness is another plus. Because most technology ETFs take a passive investment approach, aiming to track an index rather than trying to pick winners, management costs are kept low and do not eat up a large part of your returns.

Technology ETFs also offer the other benefits of ETFs that you may already be familiar with. They are transparent – you can see exactly which stocks the ETF holds by checking the ETF issuer’s website. They typically trade at near the net asset value of the portfolio. And you can invest in them like any stock on the ASX, using your online trading account or via your broker/financial adviser.

Once you decide to use ETFs to invest in technology, you have a number of choices.

Some technology ETFs aim to track a market-cap-weighted index such as the Nasdaq-100 in the US, or the S&P/ASX All Technology Index in Australia. These ETFs offer broad tech-related exposure to technology stocks traded in a particular market and can be used as a “core technology” allocation.

Other technology ETFs provide more focused exposure to a particular technology theme.

For example, BetaShares recently launched the Cloud Computing ETF (ASX: CLDD). Cloud-based computing services has been one of the fastest-growing segments of the global technology sector in recent years, and that growth is tipped to continue, with revenues forecast to grow 17.5% p.a. to reach US$832 billion by 2025[4].

CLDD allows investors to gain access to the growth potential of this sector, by providing exposure to the leading companies in the global cloud computing industry.

Other technology themes that can be accessed via ETFs include cybersecurity, and robotics and artificial intelligence.

Investors can use these more focused technology ETFs in their portfolio as a complement to a broad-based technology exposure such as an ETF that aims to track the Nasdaq-100, or as a tactical allocation to a technology theme they are interested in.

Christian Obrist, iShares

Asia has coped relatively well with the pandemic and is expected to achieve economic recovery faster than the rest of the world.

Year-to-date[5], MSCI Asia index and MSCI AxJ index have risen by 5.6% and 8.7% respectively, outperforming the S&P 500 index (+3.0%) and S&P/ ASX 200 index (+3.8%).

This can be attributed to China, Taiwan and Korea’s successful efforts to contain the spread of Covid-19, in tandem with the greater concentration of tech in their respective economies.  In our view, Asian markets will likely continue to offer attractive valuations despite the outperformance year to date.

While many markets are still struggling to recover from the virus-induced economic fallouts, Asia has remained relatively stable. China has shown expansion in manufacturing activities as well as improving retail sales, while Taiwan and Vietnam recorded strong growth.

Furthermore, China’s economy grew by 2.3% in 2020, in contrast to other countries with negative growth for the year, such as the US (-3.5%) and Germany (-5%).

However, growth rates vary among Asian countries with markets like India, the Philippines and Malaysia having experienced longer periods of lockdown and hence are expected to see slower recovery. Therefore, when investing in Asia, portfolios with diversified country allocations may provide downside protection while maintaining potential growth upside.

China, Taiwan and South Korea have transformed their roles from manufacturers of global products to disruptive technology generators in the areas of 5G, digital payments, big data, blockchain, and others.

In South Korea, tech has been one of the few sectors where earnings have been resilient. In Taiwan, the technology sector has enjoyed a surge in chip orders, reflected in the electronics exports growth in 2020. We believe there is further upside potential in the region as these areas continue to drive innovation. 

Investors are increasingly looking to diversify their positions in search of more attractive valuations and potential growth opportunities.

Currently, Asian indices appear to offer some of the best valuations among major markets globally. The Price to Book (P/B) ratio of the MSCI Asia Index is at 1.85 times, near historical lows, and significantly below other key markets such as Australia (MSCI Australia at 2.2 times) and US (MSCI US at 4.2 times) [6].

Despite such valuations, Asia is still relatively underweight in many global investment portfolios as access to many Asian markets has been perceived as difficult for foreign investors historically.

According to Broadridge’s mutual fund data, only 10% of the assets managed by global mutual funds are invested in Asian markets [7], yet Asia represents around 25% of global equity market capitalisation. This gap presents a long-term growth opportunity for the Asian markets and (fund) flows into Asia will likely continue to persist.

Story data current at March 2021. 

Footnotes and sources

[1] Source: Brookings Institute Report Enabling opportunities: 5G, the internet of things, and communities of color. 

[2] Mordor Intelligence Rsearch: BATTERY MARKET - GROWTH, TRENDS, COVID-19 IMPACT, AND FORECASTS (2021 - 2026)

[3] Bloomberg, as at 12 February 2021.

[4] Source: Research and Markets, “Cloud Computing Market by Service Model (Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS)), Deployment Model (Public and Private), Organization Size, Vertical, and Region - Global Forecast to 2025”, August, 2020. Actual outcomes may differ materially from forecasts.

[5] Source: Bloomberg as of Feb 4, 2021. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results

[6] As of Jan 29, 2021. Based on MSCI indices, sourced from Bloomberg

[7] Based on global mutual funds AUM (excluded Funds of Funds and ETFs), asset allocation determined by mutual fund geographical focus.