Investing in Innovation
Innovation ETF’s
One of the primary assumptions we make when investing is that the value of an asset is going to have more value in the future than it has today. In some cases, this is easy to predict, because the investment return might be fixed or guaranteed (e.g., a CD or treasury note). In some cases, the future value really depends on the performance of a company, their competitive advantage, and their ability to generate profits for their shareholders. However, when investing in entire sectors or industries, the more important consideration is what type of innovation the companies in those sectors are going to bring to world economies. Are they going to streamline and simplify the way businesses operate or some essential tasks of our lifestyle? Or are they going to generate profits by making a product that is so important that people view it as essential? Or maybe they just make people healthier and happier, which ultimately will also grow the economy? From an investing standpoint, innovation needs to not only solve a problem more efficiently, but it needs to do it in a way that it can produce enough profit to benefit shareholders of those companies.
The pandemic has forced companies to use technology to update and innovate nearly every aspect of their operations. Below are some of my choices for the industries that are growing to grow most rapidly in the coming decades. In many cases, Arrow clients already have exposure to these sectors via ETF’s, but please keep in mind that investing in new technology can be extremely volatile, as the current value of these sectors might be overvalued in anticipation of their future success. As a general rule, I recommend pursuing these industries if you have a long time horizon or are an aggressive investor.
1.) Healthcare: Telehealth Technology and Teletherapy
Insiders in the healthcare industry have been discussing the huge potential for using telehealth, teletherapy, and remote diagnostics as an incredible tool to lower costs, ease pressure on overextended healthcare systems, and make a variety of healthcare services more accessible to rural locations.
According to the American Medical Association, about 75% of routine doctor and urgent care appointments are either unnecessary to can be handled effectively over phone or video. They also estimate that Telehealth technology has the potential to be a $57B market in the coming decades. In addition, the uptake of therapy and counseling services has increased dramatically in recent years, particularly because of the relative comfort practitioners have with approaching therapy services from the comfort of their own home. During the pandemic, many healthcare providers have increased their remote therapy services, and have begun to tackle many of the compliance and regulation issues (HIPAA) around online mental health conversations. Funding for mental health startups increased by more than 400% from Q4 2019 to Q1 2020 because of lifestyle changes during the pandemic.
2.) Healthcare/Consumer: Virtual Fitness
The entire fitness industry was rapidly growing prior to Covid, and while virtual services like Pelton were expanding, traditional brick and mortar fitness centers were still the first choice for most people. This growth was immediately stunted during the pandemic, and nearly all fitness instructors were forced to move their services to virtual classes. Services, apps, and equipment providers that were already virtual only, like Peleton, Hysko, ClassPass, FIIT, saw almost overnight rapid success.
As the pandemic wanes, and people “return to normal”, there will be a shift back to traditional fitness centers, however, most experts think the virtual industry is going to keep a huge number of new clients, particularly those that were never comfortable working out in public in the first place. In addition, the ease and customization of virtual classes makes this an obvious sector for future growth.
3.) Industrial Robotics and Automation
If I had to pick my top choice for future investment potential, it would be industrial robotics and automation. The term “robotics” might conjure up images of robot butlers and overpriced robot vacuums, but the key word in this section is “industrial”. While consumer robotics is also a growing field mostly dominated by robot lawn mowers and vacuums, the real growth potential lies in using robotics and automation in industrial manufacturing. That is, using robots to manufacture, assemble, and transport goods. These systems are already in place at companies like Amazon and Tesla, but there is still a huge untapped market for businesses to streamline their production and (unfortunately) replace human workers. This type of automation is the definition of innovation. It immediately shifts the way entire companies do business, disrupts the production process, and allows for growth that is not possible with manual assembly.
It feels wrong promoting a technology that might replace jobs for hard-working people, but the silver lining is that if you do have some money to invest, you might be able to take advantage of this transition as it takes place.
4.) Finance: Contactless Payments
Contactless payment options such as Apple Pay, chip credit cards, or other app-based services were already rapidly growing globally prior to the Covid pandemic. Increased concerns around social distancing have led to quicker growth in the sector than might have otherwise occurred. Many businesses quickly adopted contactless payment options so their customers would feel at ease, and the entire sector is experiencing a massive influx of investor money. According to Bloomberg and Visa, the proportion of small businesses using contactless payment options increased from 20% in Q4 2019 to 39% in Q2 2020. In addition, Visa surveys indicate massive support among consumers for contactless options. This entire sector is a good example of consumer demand driving rapid business adoption. There was little incentive for many companies to adopt this technology prior to the pandemic. But when consumers are forced to make choices based on how they perceive the safety of a retailer’s checkout process, you can bet that businesses will make the change quickly.
5.) Consumer: Ghost Kitchens
Imagine a scenario where a thriving restaurant is operating a regular indoor dining service, but also expands to include food delivery. Where do you cook the food for delivery if the kitchen staff is already using all the space for restaurant diners? That problem is solved by ghost kitchens, also called cloud kitchens or virtual kitchens. These kitchens are shared locations where a variety of restaurants rent the space to cook their menu items. Ghost kitchens also allow restaurants that are closed the option to still cook and deliver their product, without the additional expense of operating a large, utility expensive location. In some cases, many restaurants have permanently shut down their physical location, and re-opened as a delivery only operation, which is another use-case for ghost kitchens.