Change is all around us. Innovation is rapidly transforming the way we live, work, communicate, shop, date, even the way we get a checkup with our doc. Who would have thought that virtual visits to our GPs would become widespread so fast? In line with these changes investing in innovative stocks has become an increasingly popular category of thematic investing. If you're looking to the future, this might be something worth considering.
When we think about innovation, the technology sector is the first thing that comes to mind. But innovation is not limited to technology, it affects all areas of the economy from financial services to energy storage. It cuts across sectors and countries. A good example is health care, with revolutionary advances like DNA sequencing, genetic cancer therapies, robotic surgery and 3D-printed implants, besides the above mentioned video consultations with your doctor.
Investing in innovation
Finding promising innovative stocks
The good news is that innovative stocks are available in several equity markets worldwide. If you want to invest in innovation, the first step is to narrow your focus and understand your chosen sector. Once you identified the most exciting areas, you want to look for innovative companies with the highest growth potential.
You could even try finding so-called disruptors, i.e. companies that have the ability to change the landscape of their entire sector. We're talking about not simply breakthrough, but disruptive innovation here, a concept that was introduced in 1995 by a Harvard Business School professor Clayton Christensen. Examples include cellular phones (disruptor) versus fixed-line telephony (disrupted) or personal computers versus mainframe computers.
"Disruption describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred."
Source: Harvard Business Review
Disruptive products and services create new markets and reshape existing ones. Disruptors like Amazon and Netflix shake up the world as we know it and this takes time.
"An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill."
Source: Clayton Christensen
The risk of investing in disruptive innovation is high. Disruptive investments carry some added risks on top of the usual risk associated with every investment. Some disruptive innovations succeed, but most of them don’t. Because of their higher than average volatility, they are more suitable for long-term investors.
How can you find innovative companies at the cusp of exponential growth?
You could, for example, check out the stocks in the Morningstar Exponential Technologies Index. This includes about 200 companies that create or use exponential technologies from all over the world.
The Morningstar Exponential Technologies Index helps investors identify companies across sectors that are in the early stages of developing or using technologies that we believe will transform society. These technologies become “exponential” as they transition from curiosity to mainstream acceptance. Morningstar defines exponential technologies as those advances expected to create significantly positive, nonlinear economic benefits for companies that produce or use them.
The index covers nine main areas:
- Big Data and Analytics (Internet of Things, machine learning, AI)
- Networks and Computer Systems Technology
- 3D Printing
- Financial Services Innovation
- Energy and Environmental Systems
- Medicine and Neuroscience
Investing in innovation
Investing in disruptive funds
If you don’t want to pick individual stocks, there are some disruptive exchange-traded funds (ETFs) out there that focus on innovative investments. Most fund managers providing innovative funds agree that this however requires active management.
US investment management firm Franklin Templeton foresees disruption in semiconductors, robotics, telemedicine and quantum computing. The company expects that innovation will be driven by the economic decoupling between China and the US. A radical adoption of automation technology in all industries is seen leading to a major disruption of labor markets in many industries.
US financial services company Fidelity identified 5 key areas of disruption:
- Automation: industrial robotics, artificial intelligence, autonomous driving
- Communication: social media, 5G-related digital infrastructure, the internet of things
- Finance: digital payments and online banks
- Medicine: gene therapy, robotic surgery, digital health platforms
- Technology: cloud computing, big data
New-York based investment advisor ARK Investment Management focuses on disruptive innovation. ARK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled new product or service that potentially changes the way the world works.
The most exciting sectors to look for investment opportunities with exceptional growth prospects, according to ARK, are:
- Gene sequencing: sequencing technology, gene editing (i.e. CRISPR) and immunotherapy
- Energy storage: battery systems, electric vehicles and autonomous mobility
- Blockchain: blockchain, fintech and frictionless value transfers
- Artificial intelligence: neural networks, mobile connected devices, cloud computing, streaming and the internet of things
- Robotics: adaptive robotics, 3D printing, drones and reusable rockets
Investing in innovation
First of all, do your research, as always, and decide which stocks or funds you want to buy. If you don't have a brokerage account, find a good broker. BrokerChooser will help you here: get a free recommendation based on your preferences. You can also check our list of best brokers for stock trading.
Compare the recommended brokers and choose the best one for your needs and goals.
Once you’ve selected the right broker, you need to open a brokerage account and deposit money on it.
Select the stocks or funds through the search function of your trading platform and place your order.
You are done! All you have to do now is to monitor your investments on a regular basis.