How to Invest in Innovation in a Concentrated Market

The AI revolution is arguably the story of the decade in the market. Since OpenAI released DALL-E in 2021, AI models, chatbots, and tools of all stripes have proliferated. That has helped tech firms provide huge returns in the last five years, boosting portfolios majorly. But it has also produced some major concentration risk.

Key Takeaways:

Investors may be salivating at the continued AI revolution, but how best to add exposure while limiting concentration risk?
A slate of tech ETFs offer exposure to rising innovators without adding those megacap names that many portfolios already hold in spades.
Funds like SPRX, GTEK, and LOUP have all outperformed the ETF Database tech equities category average in recent years.

There are routes towards adding innovation exposure in portfolios without going overboard on the biggest names. The ETF ecosystem has provided for significant innovation in investment strategies in recent years, including among tech ETFs. Active tech ETFs can provide exposure to rising names that can limit or even exclude the names to which investors are already heavily exposed.

They do so by fully leveraging active flexibility and fundamental research-driven, bottom-up investing. Take, for example, a fund like the Spear Alpha ETF (SPRX). SPRX just celebrated five years of operation, charging 75 basis point (bps).

The fund looks for global innovators by combining top-down analysis and bottom-up research. SPRX invests in firms across the supply chain for decarbonization, digitization, robotics, photonics, space exploration, AI, and more. It does so with just the lightest exposure to the biggest names, in a small 0.1% allocation to Meta (META) as of August 13, according to data from the shop.

SPRX has provided strong outperformance over the last three years with that approach, returning 38.9% in that time, per ETF Database data, significantly outperforming the ETF Database technology equities category average. The three-year average comes in at 19% as of August 13.

The Goldman Sachs Future Tech Leaders Equity ETF (GTEK) makes the focus on rising names even more explicit. GTEK charges a 75-bps fee, as well, and purposefully excludes megacap tech names.

The active tech ETF also employs a bottom-up approach that focuses on disruptors and innovators. It invests across subsegments like communications, healthcare, and marketing to find innovators. That has helped it return 64.4% over the last 12 months without adding concentration risk, also outperforming the tech equities category average.

Finally, advisors can also meet investor demand for more tech exposure in funds like the Innovator Deepwater Frontier Tech ETF (LOUP). LOUP charges 70 bps and avoids those megacap names, as well. The fund has returned 48.5% over the last 12twelve months, which also beat that tech equities category average.

LOUP avoids adding concentration risk by focusing on innovation, at the “frontier” of new tech. While it holds some notable tech names like Shopify (SHOP), it doesn’t hold the megacap names that dominate. It instead offers an indexed approach.

Together, those ETFs can take advantage of a broader economic growth path. There are opportunities out there, but adding more broad market exposure may not offer the answer. Instead, a small subcategory of tech ETFs can help advisors meet client goals entering the second half proper.

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our videos.

How to Invest in Innovation in a Concentrated Market

Key Takeaways:

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