Why sector is critical to investment portfolios and building long-term wealth.

Today’s pace of change is relentless. At January’s World Economic Forum, we heard a lot about the “fourth industrial revolution” and how technology has radically reshaped the way we live, communicate, work and travel.

Companies behind these new technologies now dominate the share market and have driven much of the world’s wealth creation over the past 20 years.

Nothing more clearly demonstrates this than the list of the five largest companies in the USA by market capitalisation: Apple, Microsoft, Alphabet (Google), Amazon and Facebook.

The development and application of technology is now the dominant factor in determining an economy’s success.

As Max Cunningham, Executive General Manager, Listing and Issuer Services at ASX notes, “From an investor’s perspective, being aware of and gaining exposure to the fastest growing sector in the economy, is critically important in any investment portfolio in building wealth.”

The new S&P/ASX All Technology index

Keeping abreast of companies involved in the technology sector can be a challenge; as the sector matures and evolves, new companies emerge and grow.

Thankfully, there is now a comprehensive benchmark that monitors the sector’s overall performance — the S&P/ASX All Technology Index (All Tech Index).

Launched on 24 February 2020, the All Tech Index for the first time brings together companies across a range of sectors whose businesses are primarily technology focused.

Using the classification system developed by MSCI and Standard & Poors — the Global Industry Classification Standard or “GICS” — the All Tech Index includes ASX listed companies from the GICS:

• information technology sector;
• consumer electronics subindustry;
• internet and direct marketing retail subindustry;
• interactive media and services subindustry; and
• health care technology subindustry.

Eligibility for the index is determined by additional investability requirements, including a minimum three-monthly average float-adjusted market capitalisation of over $120 million and a range of additional liquidity metrics.

The breakdown of sector inclusion in the All Tech Index by number of companies and index-weighted market capitalisation is shown in the graphs below.

Source: ASX

Any ASX-listed company that meets the eligibility requirements is selected for inclusion, with the index rebalanced each quarter. As at the December 2019 rebalance, 46 companies were included in the new index.

Index constituents and performance

Not surprisingly, the rapid development of ASX-listed technology companies has seen the top 10 constituents change quite dramatically; even over the past three years. Only three companies included in the index, if it had existed in June 2014, remain in the top 10 as at December 2019.

New entrants into the top 10 over this period, include Xero, Afterpay, REA Group, WiseTech, Appen and NextDC.

The graphic below illustrates the change to the All Tech Index top 10 constituents between June 2014 (had it then existed) and today.

The growth in the market capitalisation of the index has surged from $36 billion to now over $100 billion — an extraordinary 178 per cent increase in only three years.

Not surprisingly, investors will be keen to gain exposure to the index.

Source: ASX

The All Tech Index will encourage product issuers to create investment vehicles tracking the index, giving investors access to the market’s growth.

S&P and ASX-created sector indices are designed mainly to provide the market with a benchmark that enables investors and product issuers to measure performance and facilitate investment in the sector reflected by the index.

ASX believes the All Tech Index will become the market’s benchmark for the technology sector as a whole; spurring investment activity and, in turn, attracting new companies to consider ASX as their listing venue.

For ASX, the technology sector has become increasingly important as companies see the advantages of raising capital by listing on the ASX. Whilst the majority of these companies are Australia-based, an increasing number of companies are coming from other countries as diverse as Israel, USA, Ireland, NZ and Germany.

Non-Australia-based ASX listed companies currently included in the All Tech Index include Xero, Volpara Health and Pushpay (NZ), Fineos (Ireland) and Life360 and LiveTiles (USA).

Investors can find out more about the All Tech index on ASX’s dedicated webpage.  General information about S&P/ASX is also available as well as S&P’s comprehensive index information website.