‘The next Apple isn't Apple’: a strategy that targets tech innovation

TDAM analyst unpacks the long-term philosophy behind firm’s growth-oriented global tech ETF

‘The next Apple isn't Apple’: a strategy that targets tech innovation

After watching the meteoric rise of Apple and Amazon, many investors may find it difficult to imagine a world where either of them could be challenged. But like any investment professional, Vitali Mossounov, Global Technology Analyst at TD Asset Management Inc. (TDAM) knows that past performance doesn’t guarantee future results.

“Over the last decade, picking the big five tech companies has been a very successful approach. And the wave of broadband, smartphones, and other developments that lifted these five horsemen could last for some time,” said Mossounov.

“But we’re also going to see a lot of challenges, not least of which is on the regulatory front, that should boil over into some meaningful changes in how these businesses operate,” he said.

Even without external pressures, tech companies can face growth challenges, Mossounov added. While Apple’s $3-trillion market cap and nearly $400 billion in sales might make it seem unstoppable, it also means companies at that size will also find it exceptionally difficult to continue to deliver returns outsized to the market.

“The next Apple probably isn’t Apple,” says Trevor Cummings, Vice President of Exchange-Traded Fund (ETF) Distribution at TDAM. “So it might be better to broadly diversify one’s technology exposure to increase the probability of capturing the next opportunity, rather than pick a couple of stocks and have 0% of it.”

To help investors get exposure to what could be tomorrow’s tech giants, TDAM recently launched the TD Global Technology Innovators Index ETF. Listed on the TSX as TECI, it provides exposure to a basket of technology innovators from across the world that Mossounov and his team believe could rise to the top.

TECI was designed to complement the TD Global Technology Leaders Index ETF, which trades as TEC. As Cummings explains, TEC is built for investors who want to get as much pure exposure as they can to the technology of today.

“When we set out to build our flagship TEC fund, we had to solve a big problem. Investors were asking us to give them 100% technology exposure and yet every other instrument in the market was tainted, " Cummings says. "You think you're buying a tech product only to learn later you've ended up with AT&T and Starbucks thrown into the mix. They may be great businesses but they're not tech!"

With TEC, TDAM took a scalpel to industry classifications and helped design a product with pure technology exposure. With TECI, that same scalpel was again applied with surgical precision but this time only to what the team believed had the potential to be the great businesses of tomorrow.

“Some investors might already be comfortable with their allocation to the great tech platforms, and now want to get exposure to some growth companies but don’t have time to look into all of them,” Mossounov said. “With TECI, we believe we’ve created a way to help investors buy companies that are rising up the ranks.”

TECI’s index offers a fairly concentrated portfolio of 100 high-growth technology names, and uses a sophisticated screen to select top performers on three metrics: revenue growth, margin expansion, and return on invested growth capital. Mossounov believes that these three measures can be effective predictors of technology companies’ long-term returns.

“There are tech companies out there that are highly speculative and could be great businesses, but a lot of them have little to no revenue,” he says. “We're going past the hype. We don't think our investors want that. We’re investing in companies that are engaged in very real commercial innovation with products that customers are already buying today but are still in hyper-growth mode.”

As an innovation-focused strategy, TECI has investments in high-growth businesses that are in the early stages of capturing their markets. That makes the ETF more susceptible to bouts of volatility like the markets have seen recently, though it has the potential to do very well in the long run.

“If we look at the big picture, technology is where the disruption is, so it’s where the volatility is. But it’s where the opportunity is as well,” Cummings says. “If someone’s bought technology exposure for that opportunity, things could certainly get worse before they get better. But this is a very interesting time to consider either adding or increasing the allocation within their portfolios.”