Technology is a major disruptive force in our world, and as such one of three broad areas of profound structural changes (‘megatrends’) along which the STOXX Thematic indices from Qontigo are classified (the other two are socio-demographics and the environment).
Tech-driven change has continued this decade in the face of – and in fact, often, because of1 — lockdowns, economic slowdown and geopolitical conflict. Many of the challenges posed to consumers and businesses by these temporary snags have led to faster adoption of technological advancements.
In this blog we will revisit seven theme-based index strategies tracking companies whose technological products and services impact the way we live. Together, the indices offer multi-thematic exposure to the economics of a world already immersed in a digital future.
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On thematic indices
There are over two dozen STOXX Thematic indices, which target structural and forward-looking themes disrupting our modern societies. They do so by identifying and gaining exposure to the companies leading and benefitting from such disruption. Some key characteristics of the STOXX thematics suite are:
- Thematic strategies are chosen for their well-researched potential to outpace market growth rates.
- The seven indices below use a revenue-based methodology to accurately select companies most exposed to the theme in question. This screening relies on FactSet’s Revere (RBICS) granular business taxonomy.
- Stock selection is sector-agnostic; therefore, a thematic portfolio will look very different from a traditional industry-focused one.
- Stocks are weighted by an adjusted equal-weighting scheme to balance between diversification and liquidity.
- Additionally, the indices reviewed below remove companies that fail to pass certain sustainability screens.
Seven indices to invest in the digital future
It is remarkable that the automation of factories, one of modern history’s longest-running themes, is going as strong as ever. More than three robots were installed in factories in 2021 for each one that was installed a decade earlier.2 As of last year, a record 3.5 million robots were employed in manufacturing everything from cars to electronics and food, a 14% compound annual growth since 2016.
Transformational healthcare stocks are different from Big Pharma, the companies that dominate traditional sector-based indices. They are often much smaller and focused, and can be game-changers in a particular niche. At the cutting edge of technology, they have the potential to make traditional drug therapies obsolete and create whole new markets.
The breakthrough healthcare industry continues to grow as new products meet an ever larger and older population. Just the global biotechnology market targeting health was valued at 500 million dollars in 2021.3
Digital education is underpinning a revolution in learning as a smarter, more personalized alternative to the traditional and print-based mode, presenting cost, access and reach benefits. The value of the global digital education market is expected to grow 31% annually between 2021 and 2028, to 77 billion dollars.4
In entertainment, the conversion to digital — which includes video and music content, live streaming, social media and gaming — has been even more radical. The online entertainment market size was valued at 183 billion dollars in 2019, and is expected to grow by an annual compound growth rate of 21% to 653 billion dollars by 2027.5
Digitalization refers to the transformation of traditional and new activities via intelligent technologies. At the consumer level, this shift has been epitomized by the phenomenal penetration of the mobile phone in our daily lives, but digitalization has equally impacted all industries. E-business, e-commerce, social media, and interactive and transactional platforms have changed businesses for good.
The cross-industry reach of the digitalization trend is reflected in the sector allocation of the STOXX Global Digitalisation index, with top holdings derived from the Retail, Financial Services, Technology, Real Estate, Technology, Consumer Products and Media Supersectors.
For all its mark, the digital revolution may yet be in its early stages. Revenues from global digital transformation are expected to expand at more than 20% a year this decade.6
With ever-deeper penetration of digitalization, intelligent systems and the Internet of Things, a major need to protect information and secure personal access and privacy continues to grow. The STOXX Global Digital Security index is comprised of companies that are involved in the transmission, safeguarding and handling of sensitive data, or access control of secure locations.
With strong representation of the Technology, Telecommunications and Industrial Goods & Services Supersectors, the index currently tracks 112 companies ranging from large-caps such as Oracle and Cisco Systems, to highly specialized small-caps.
They are more efficient, safer and rely on clean energy. Sales of electric cars hit 6.6 million in 2021, more than tripling their market share from before the pandemic, even as demand for conventional cars fell and manufacturers faced supply-chain bottlenecks.7 Today, as many electric cars are sold per week as were sold in one full year a decade ago.
The STOXX Global Electric Vehicles & Driving Technology Index is comprised of manufacturers of electric and autonomous vehicles, as well as suppliers of batteries and related products. Just over half of the holdings in the index are in the Automobiles & Parts ICB Supersector, with other investments allocated to Technology and Industrial Goods & Services.
The index tracks companies deploying the physical structures and facilities needed as urban development gets more intelligent and efficiency-focused.
The use of smart systems in utilities, water treatment, transportation, security, recycling, connectivity, and roads and bridges is increasingly the solution to the modern challenges of expanding populations, limited natural resources, climate change and environment degradation. Some problems have been even more immediate: COVID-19 and the invasion of Ukraine have raised new challenges in cities’ medical services and energy sourcing.
The global smart infrastructure market may grow 24% annually between 2021 and 2028, to 434 billion dollars, according to some estimates.8
Access thematic indices through ETFs
These seven STOXX strategies are accessible via ETFs from iShares by BlackRock. Their methodology can be accessed by visiting the index guide on each index page.
Thematic indices offer a transparent, rules-based and economical way to capitalize on macro trends, of which technological innovation is one of the biggest drivers. A combination of the indices can help investors harness the upside of companies leading the transition to the digital future.
1 According to a survey by KPMG, 74% of US CEOs say the pandemic has accelerated the digitization of operations and the creation of a next-generation operating model in their companies.
2 Data from the International Federation of Robotics (IFR).
3 ‘Biotechnology Market Size & Growth Trends Report, 2030,’ Grand View Research.
4 Source: Grand View Research, July 2021.
5 Source: ‘Online Entertainment Market 2020,’ Allied Market Research.
6 ‘Digital Transformation Market Size Report, 2022-2030,’ Grand View Research.
7 ‘Electric cars fend off supply challenges to more than double global sales,’ IEA (International Energy Agency).
8 Estimates from Fortune Business Insights.
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Part of the Deutsche Börse Group, Qontigo was created in 2019 through the combination of Axioma, DAX and STOXX. Headquartered in Eschborn, Germany, Qontigo’s global presence includes offices in New York, London, Zug and Hong Kong.