The Morningstar® Exponential Technologies Index℠ redefines tech investment across the economy.
By Dan Lefkovitz
By Dan Lefkovitz
Read Time: 3.5 Minutes
Investing in technologies poised for exponential growth possesses inherent appeal. Companies like Intel, Google, and Amazon have changed the way we work and live, delivering massive profits and share-price appreciation along the way.
Morningstar created the Exponential Technologies Index to highlight transformational innovation. Launched in 2014, the index redefines technology indexing in several ways. First, it’s not narrowly confined to companies classified as technology-related on sectoral or industry lines.
It recognizes that companies benefiting from innovation can be found across the economy, including in sectors like industrials, financial services, healthcare, and energy.
Second, the index identifies technological themes, then uses the insights of Morningstar’s equity research team to select the companies best positioned to benefit—as producers, users, or suppliers. Third, the index is unconstrained by geography, including companies across the globe.
We examined the index’s performance and portfolio characteristics and concluded that the index’s diversified collection of innovators has delivered strong performance, driven more by stock selection than by riding a wave in the technology sector.
Morningstar’s equity research team views nine technological themes as poised for exponential growth:
Some of the themes encompass a number of trends. For example, Networks & Computer Systems includes the “internet of things,” 5G networks, and virtual reality. Immunotherapy is a powerful field captured within the Medicine & Neuroscience theme. Blockchain and cryptocurrency fall under the broader category of Financial Services Innovation. The themes are subject to change at the index’s annual December reconstitution but have remained constant since 2014.
With the themes selected, Morningstar equity analysts work backward to identify the companies they feel are best positioned to benefit—as producers, users, or suppliers.
Given the range of themes and beneficiaries, the index more closely resembles a diversified global growth than a narrow thematic offering. From a sector perspective, it’s heavy on technology, but the healthcare weight is just as high, and financials, industrials, and communications also feature prominently.
Geographically speaking, the index is roughly 60% United States and 40% rest of the world, with above-market weight to European names like Roche (RHHBY) and AllianceBernstein (AB) and with Chinese tech giants Alibaba (BABA) and Baidu (BIDU) also included.
The past several years have been favorable to the technology sector. But thanks to its 200-stock equal-weight construction, the index actually holds less of the high-flying FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google-parent Alphabet) than the Morningstar® Global Markets Index℠ from which it is derived.
Performance attribution conducted in Morningstar Direct shows that the index’s excess returns versus the Global Markets Index since 2014 have been driven not just by being in hot sectors but also by selecting stronger-performing stocks than its benchmark. Top contributors have included not just tech stocks like NVIDIA (NVDA) and Advanced Micro Devices (AMD) but also those in healthcare like Exelixis (EXEL), financials like CME Group (CME), and telecom like T-Mobile (TMUS).
By combining an expansive view of innovation and leveraging Morningstar equity research analysts to select beneficiaries, the Morningstar Exponential Technologies Index has taken a unique and successful approach to technology indexing.
Dan Lefkovitz is a strategist for Morningstar's Indexes product group.
Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission. Opinions are given in good faith, as of the date given, and subject to change without notice. The information, data, analyses and opinions contained herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Investors must exercise their own independent judgment as to the suitability of investments and recommendations in the light of their own investment objectives, experience, taxation status and financial position. Investments in securities are subject to market and other risks and there is no assurance or guarantee that the intended investment objectives will be achieved. Past performance may or may not be sustained in future and is no indication of future performance. Indexes noted within the report are unmanaged, their returns do not include payment of any sales charges or fees an investor would pay to purchase securities and cannot be invested in directly.