Three Ways to Invest in Tech
There isn’t only one way to invest in technology. With artificial intelligence and other innovations poised to change the way we work and live, Brad Cross, BMO Global Asset Management’s Director, Intermediary Distribution, Ottawa-Kingston, breaks down three strategies that may offer your clients access to the next industrial revolution.
May 2023
Brad Cross
Director, Intermediary Distribution, Ottawa-Kingston
The next industrial revolution
Over the last several months, ChatGPT has taken the world by storm. It was a development that at once seemed inevitable and shocking: for years, we’ve been hearing about the potential of artificial intelligence (AI), but few of us expected to see something so capable emerge so suddenly. From the various exams it is reported to be capable of passing—running the gamut from a sommelier test to a Wharton MBA final assessment—to teachers’ concerns about the impact ChatGPT will have on the education system, AI is already changing the way the world works. This begs several questions that Advisors may already be hearing from clients, including: if this is the impact that emergent technologies can have in only a few months, what kind of longer-term changes will they bring about? And what will it all mean for tech companies and investors?
In the market cycle, Technology tends to lead—even before last year, it was the first sector to be hit by inflation, and in 2023, it’s been among the first to rebound. In the longer term, it is the belief of BMO Global Asset Management (GAM)’s Global Equity team, which includes tech sector specialists, that innovation, and AI in particular, will serve as the basis for the next industrial revolution—and that this revolution will offer significant opportunities for investors. But as Advisors well know, not all investors are alike; they may have different goals, time horizons, and risk tolerances. Many client portfolios already have exposure to the FAANG companies—Facebook (now Meta), Apple, Amazon, Netflix, and Google (now Alphabet)—as individual stock holdings, and while this certainly isn’t a bad thing, it does leaves portfolios exposed to diversification risk and reduces potential gains from the next market leaders. These are all among the reasons BMO offers several different ways to invest in tech depending on your client’s particular situation. Here are three solutions worth considering:
In the market cycle, Technology tends to lead.
BMO Nasdaq 100 Equity ETF Fund: One-ticket exposure to the tech universe
The BMO Nasdaq 100 Equity ETF Fund is a core growth portfolio holding offering exposure to effectively the entire tech universe through its index approach. This strategy and the fund’s Medium risk rating differentiate it from actively-managed and/or higher-risk tech solutions, and make it well-suited for a broader range of client portfolios.
The Nasdaq-100 is a capitalization-weighted, ex-Financials index, meaning that the fund’s exposure is mainly focused on mature tech companies—names like Microsoft, Apple, and Alphabet (Google). These types of corporations tend to generate very strong earnings with many of them also engaged in stock buybacks, offering strength and comparative stability as part of a diversified portfolio. The bulk of the underlying mandate’s exposure is in the Information Technology (55%) and Consumer Discretionary (20%) sectors1.
Among the fund’s most attractive features is the Nasdaq-100 index’s long track record of relative outperformance versus the S&P 500—which, needless to say, is not an easy index to beat. In fact, as the chart below illustrates, the Nasdaq-100 has outperformed the S&P 500 in 12 of the past 15 calendar years.
Index Annual Total Returns
Source: Nasdaq, Bloomberg, as of March 31, 2023.
BMO Global Innovators Fund: A multi-sector approach to innovation investing
The BMO Global Innovators Fund offers access to a high-conviction portfolio of approximately 50-60 companies involved in the development of innovative products, processes or services. It is actively managed by BMO GAM’s award-winning2 Global Equity team and carries a Medium risk rating.
The Global Equity team’s years of experience has led them to a key insight which underpins the Global Innovator Fund’s strategy: innovation is not the exclusive domain of the Technology sector. In fact, innovation has exploded in all industries as companies transform into digital businesses. The BMO Global Innovator Fund’s holdings reflect that philosophy, representing a broader spectrum of sectors than other innovation-focused solutions. The emphasis is not only on companies that have done well lately, but on emerging trends in innovation, asking the question—who will be leading the way over the next decade?
In innovation investing, timing is everything, and it’s best to be early. That’s the difference that the Global Equity team makes: they’ve dedicated decades of work to developing a global network to assist them in finding and evaluating the most innovative companies in the world. This gives them a radar-like ability to identify emerging trends at an early stage and best determine where to allocate the fund’s investment dollars.
The BMO Global Innovator Fund’s strategy is underpinned by three themes—Artificial Intelligence, the Reopening of the Global Economy, and Networking & Connectivity—and offers the benefits of geographic diversification. Whereas the Nasdaq-100 is overwhelmingly comprised of US-based companies, the BMO Global Innovators Fund includes holdings from many different countries:
Innovation is Happening Everywhere
BMO Global Innovators by Country of Risk
NASDAQ 100 by Country of Risk (NDX)
Source: BMO GAM, Bloomberg Finance L.P., NDX Index, as of February 28th 2023
BMO ARK Innovation Fund: Investing in the future today
The BMO ARK Innovation Fund’s strategy differs significantly from the BMO Nasdaq 100 Equity ETF Fund and the BMO Global Innovators Fund in that it has no exposure to the FAANG companies. Aside from Tesla, which ARK founder Cathie Wood sees as the likely leader of an impending robotaxi boom3, ARK’s focus is on emerging innovators rather than mega-cap names, with a greater allocation to Health Care and an underweight to Information Technology relative to the Nasdaq-100. It is somewhat more concentrated than the previous two strategies profiled, both in terms of the number of holdings in its portfolio and the weight allocated to its top holdings, and it carries a High risk rating.
ARK’s approach is driven by Cathie Wood’s forty-plus years of experience identifying and investing in “disruptive innovation,” which ARK Invest defines as “the introduction of a technologically enabled new product or service that potentially changes the way the world works.”4 Rather than focusing on particular sectors or geographies, ARK’s team of analysts are organized according to five innovation themes:
- Artificial intelligence
- DNA sequencing
- Robotics
- Energy storage
- Blockchain
In the same way that three technological breakthroughs—the telephone, the automobile, and electricity—enabled the rapid transformation of society in the late nineteenth century, Wood and ARK believe that these five platforms are poised to lead the global economy as it undergoes the greatest technological transformation in history.
Comparison – three tech strategies:
| Fund | Fund code (Series F) | Management (Active vs. Passive) | MER | Risk rating |
|---|---|---|---|---|
| BMO Nasdaq 100 ETF Fund | BMO95120 | Passive | 0.40% | Medium |
| BMO Global Innovators Fund | BMO95164 | BMO40164 (USD) | Active | 0.99%* | Medium |
| BMO ARK Innovation Fund | BMO95265 | Active | 0.85%* | High |
Source: BMO Global Asset Management, Bloomberg, as of April 30, 2023.
* Management Expense Ratio (MER) is estimated as Fund is less than one year old.
Top holdings:
| BMO Nasdaq 100 ETF Fund | BMO Global Innovators Fund | BMO ARK Innovation Fund |
|---|---|---|
| Microsoft 13.4% | Meta 5.3% | Tesla 10.3% |
| Apple 12.7% | Apple 4.0% | Roku 7.7% |
| Amazon 6.3% | Alphabet (Class A) 3.3% | Zoom 7.4% |
| NVIDIA 5.2% | Microsoft 3.1% | Coinbase 6.1% |
| Meta 4.1% | NVIDIA 3.0% | Block 5.8% |
| Alphabet (Class A) 3.8% | EDU 2.9% | Exact Sciences 5.6% |
| Alphabet (Class C) 3.8% | Trip.com 2.8% | UiPath 5.3% |
| Tesla 3.0% | Baidu 2.8% | DraftKings 4.8% |
| PepsiCo 2.0% | Shopify 2.8% | Shopify 4.6% |
| Broadcom 2.0% | Shell 2.7% | Teladoc Health 4.5% |
| Top 10 Weight 56.3% | Top 10 Weight 32.7% | Top 10 Weight 62.1% |
| Total Holdings 101 | Total Holdings 48 | Total Holdings 27 |
Source: BMO Global Asset Management, Bloomberg, as of April 30, 2023.
Please see my briefcase for any support and guidance.
1 BMO Global Asset Management, as of May 2023.
2 TopGun Investment Minds Platinum Class winners 2021/2022 – Platinum Class Winners, Malcolm White, Jeremy Yeung. Platinum Class awarded to individuals who have been Designated TopGun in four consecutive years.
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