How to Invest in Innovation

14 Nov 2022

Investing Interests
Image of a lightbulb - metaphor for innovation.

The what, why and how of investing in innovation.

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What is Innovation?

The desire to innovate is a basic human characteristic – building and iterating on what came before to create something new and better. Steve Jobs, one of the greatest innovators of the 20th and 21st centuries, said that “I think humans are basically tool builders, and the computer is the most remarkable tool we've ever built” (1). We create tools, and use our tools to make new things.

Innovation has improved our lives exponentially. From the development of the compass in 12th century China to the creation of the internet in the 20th century, innovation has helped humans to live easier, safer, and more connected lives and disrupted stagnant industries along the way.

Most recently, innovation has come in the form of artificial intelligence (AI), clean energy technology, and driverless cars. AI technologies are transforming how our society communicates and operates by way of virtual assistants, manufacturing robots, social media monitoring, and proactive healthcare management. Meanwhile, battery-run electric vehicle sales are estimated to hit 29% of all cars sold by 2030, paving the way to a cleaner future globally. And autonomous vehicles, also known as self-driving cars, will reduce traffic and parking congestion, decrease accidents caused by human error, and curtail pollution.

Innovative technologies disrupt major industries, helping to break up the status quo and leaving businesses behind that either can’t or won’t keep pace. With modern-day Edisons like Elon Musk, Sergey Brin, and Marc Benioff continuing to sprout up, the American Dream is alive and well and innovation is here to stay, accelerating as the years go by.

If you are an investor interested in new technologies, investing in innovation is a great way to get involved, and even potentially profit from innovation, with quadruple-digit returns for those able to hunt down cutting-edge companies. For those that don’t have the time or expertise to analyze a multitude of companies, exchange traded funds (ETFs) are excellent ways in which to invest in these innovative industries (2).

Why Invest in Innovation?

Investing in innovation carries risks, but can also be highly rewarding. The S&P 500 index tracks the performance of the 500 largest companies listed on stock exchanges in the US. The companies on this index are getting younger and younger – in 1958 the average age of an S&P 500 company was 60 years. By 1965 this was down to 32 years and down to 21 years in 2020 (3). Statista predicts the average age will be 17 by the year 2030. Young, innovative companies can grow and adapt more quickly than older, established companies and are pushing them out of the S&P500.

What are top innovation trends?

Here are a few exciting opportunities in the innovation space. Each of these trends have a variety of ETFs for investors to participate in:

Artificial Intelligence

Artificial Intelligence (AI) has arrived in a big way though many people are unaware how it affects their everyday lives. Current applications include online shopping & advertising, vehicles, and even our smart appliances, with more advanced applications being cybersecurity, and healthcare with improved diagnostic pathology. The total market for AI is “projected to grow from $387.45 billion in 2022 to $1,394.30 billion by 2029,” - representing a compound annual growth rate of 20.1% during that period (4).

Autonomous Vehicles

Autonomous Vehicles are currently at an early stage but it is an emerging trend, with many companies battling it out to take over market share. A significant benefit of these self-driving vehicles is the elimination of human error. Government data has estimated that driver behavior and error are factors in 94% of crashes. Increased levels of autonomy would reduce human error, making the roads safer for everyone. The other major benefit is reduced congestion and an expected decrease in pollution & emissions.

Blockchain

Blockchain is one of the least understood but one of the most significant innovations. A blockchain is essentially a chain of data blocks with contained information that is recorded, made public, and cannot be altered. Statista anticipates that the size of the blockchain market could reach $1.2 trillion dollars in 2023 - up from $5.8 billion in 2021 (5). Blockchain is mostly widely used as a decentralized legeder for cryptocurrency transactions, but potential applications to any industry where you need to record transactions, including supply chains, healthcare, insurance and banking.

Genetics

Genetics, a branch of biology that deals with the heredity and variation of organisms, is expected to be a major area of innovation in the next decade. Gene editing has been called the most significant innovation of the decade by some sources, given that it allows scientists to change the DNA of organisms, including plants and animals. In humans, this offers the ability to treat inherited diseases, with the first application being in eye surgery to treat inherited blindness.

Additive Manufacturing

Additive Manufacturing, also known as 3D printing, allows you to create any object one layer at a time. The additive manufacturing process allows you to create bespoke parts and products more quickly, and at a lower cost. 3D printing is now even being applied to healthcare, where tissues and organs can be created for transplant into the human body.

How do I Invest in Innovation?

Investing in innovative companies can be exciting, but also risky. These companies are on the cutting edge of technology – applying new ideas to make our world a better place. To find them just search “innovation” on Magnifi and you’ll find stocks, ETFs, mutual funds, and closed-end funds with exposure to innovation. Try these searches to get started:

References:

  1. Burlingham, Bo and Gendron, George, “The Entrepreneur of the Decade: An interview with Steven Jobs, Inc.’s Entrepreneur of the Decade.” https://www.inc.com/magazine/19890401/5602.html
  2. Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
  3. Statista, “Average company lifespan on Standard and Poor's 500 Index from 1965 to 2030, in years,” https://www.statista.com/statistics/1259275/average-company-lifespan/
  4. “Artificial Intelligence (AI) Market Size, Share & COVID-19 Impact Analysis,” Fortune Business Insights, https://www.fortunebusinessinsights.com/industry-reports/artificial-intelligence-market-100114 (https://www.fortunebusinessinsights.com/industry-reports/artificial-intelligence-market-100114).
  5. Blockchain technology market size worldwide in 2021, with a forecast for 2030, https://www.statista.com/statistics/1319369/global-blockchain-technology-market-size/, 11/11/2022
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Disclosures

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. Investors should carefully consider the investment objectives and risks as well as charges and expenses of all innovation-related securities before investing. Read the prospectus carefully before investing. ETFs and mutual funds are actively managed and there is no guarantee that the manager’s investment decisions will produce the desired results. All investments involve risks, including possible loss of principal. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below their net asset value. Brokerage commissions and fund expenses will reduce returns. You should carefully consider a fund’s investment goals, risks, charges and expenses before investing. Download a summary prospectus and/or prospectus, which contains this and other information and read it before you invest or send money.