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What is Innovation?

The desire to innovate is a basic human characteristic, defined as the creation, development, and implementation of a new product, process, or service, with the goal of improving efficiency and effectiveness. From the compass that dates back to 12th century China to the steam engine that fueled the Industrial Revolution and the discovery of electricity and the invention of transistors, innovation has improved our lives exponentially.

More recently, innovation has come in the form of the internet, artificial intelligence (AI), clean energy transportation, and autonomous vehicles. Since its humble beginnings in the ‘90s, the internet has grown to 4.6 billion users, with over 5 billion mobile phone owners and more than 2 billion of these users shopping online each year. AI technologies are transforming how our society communicates and operates by way of virtual assistants, manufacturing robots, social media monitoring, and proactive healthcare management. Meanwhile, battery-run electric vehicle sales are estimated to hit 29% of all cars sold by 2030, paving the way to a cleaner future globally. And autonomous vehicles, also known as self-driving cars, will reduce traffic and parking congestion, decrease accidents caused by human error, and curtail pollution.

Innovative technologies will disrupt major industries, leaving many of the former players obsolete. With modern-day Edisons’ like Elon Musk, Sergey Brin, and Marc Benioff continuing to sprout up and the American Dream is still alive and well, innovation is here to stay and will only accelerate as the years go by.

For investors, the opportunities to participate span across many industries, with quadruple-digit returns often waiting for those able to hunt down the leading-edge companies in the groups experiencing the most significant innovation. For those that neither have the time or expertise to analyze a multitude of companies, exchange traded funds (ETFs) are excellent ways in which to invest in these innovative industries.

Why Invest in Innovation?

People are often resistant to change, but with multiple secular trends changing the landscape of our world rapidly, investing in innovation is essential to staying ahead of the curve. This is evidenced by the average tenure of S&P-500 companies sliding from 33 years in 1964 to 24 years in 2016, with expectations of being just 12 years before the end of this decade. While antiquated companies whose stocks have provided quadruple-digit returns in the past might be familiar to investors and easy to understand, they typically lag the performance of their more innovative peers, with the best-returning stocks being those 15 years or less out from their IPO date. So, while easy to understand and familiar technologies might be suitable for everyday life, they’re inferior in the ever-changing investment landscape. This means that if investors want to place themselves in the right proverbial fishing holes for market-beating returns, keeping a close eye on new trends and innovative technology is imperative.

What Are the Top Innovation Trends?

When it comes to the top innovation trends, there are dozens of opportunities. We’ve compiled a list of what looks to be some of the most relevant opportunities and areas investors should be focused on. Each of these trends have a variety of ETFs for investors to participate in:

Artificial Intelligence (AI) has arrived in a big way though many people are unaware how it affects their everyday lives. Current applications include online shopping & advertising, vehicles, and even our smart appliances, with more advanced applications being cybersecurity, and healthcare with improved diagnostic pathology. The global AI market is projected to reach $191.60 billion by 2025, growing at a CAGR of 36.68% over the forecast period.

Autonomous Vehicles are currently at an early stage but it is an emerging trend, with many companies battling it out to take over market share. A significant benefit of these self-driving vehicles is the elimination of human error. Government data has estimated that driver behavior and error are factors in 94% of crashes. Increased levels of autonomy would reduce human error, making the roads safer for everyone. The other major benefit is reduced congestion and an expected decrease in pollution & emissions.

Blockchain is one of the least understood but one of the most significant innovations. It is a system of recording information in a way that makes it near impossible to hack or cheat the system. A blockchain is essentially a chain of data blocks with contained information that is recorded, made public, and cannot be altered. Annual spending on blockchain solutions is expected to come in above $15 billion by 2023. If adopted, disruption opportunities are widespread, with one target being the banking industry by disintermediating services that banks provide.

Genetics is expected to be a major area of innovation in the next decade, with genetics being a branch of biology that deals with the heredity and variation of organisms. Gene editing has been called the most significant innovation of the decade by some sources, given that it allows scientists to change the DNA of organisms, including plants and animals. In humans, this offers the ability to treat inherited diseases, with the first application being in eye surgery to treat inherited blindness. Other significant opportunities include agriculture, with the ability to increase yields and quality and plant drought resistance for crops.

Industrial Robotics is another innovation that has arrived quicker than most expected, providing a massive boost to productivity for corporations. Unlike humans, robots don’t need incentives to perform at their full potential, don’t need sleep, and can keep up a consistent pace 24/7. While opinions are divided on robotics given that it displaces jobs at many plants and warehouses, the two major benefits they do offer outside of cost savings for corporations are safety and precision. In mining, it’s much safer to send robots one mile below the surface to carry out tasks, and in healthcare, precision is everything when it comes to surgery. In a world where investors demand higher profits and margins, the opportunities across dozens of industries will continue to grow.

Virtual and Augmented Reality is one of the newest avenues of innovation, with VR offering a complete immersion experience using a headset and AR being an interactive experience of a real-world setting with the objects being enhanced through the use of a smartphone, like the Pokemon Go craze in 2016. The most obvious application is gaming, but many other industries are adopting AR, including manufacturing, mining, education, and travel. In the latter case, consumers now have access to a 360-degree tour of hotels, restaurants, and tourist spots to give them an idea of what to expect. Some estimates project a 40% compound annual growth rate looking out to 2028 for AR alone, with the potential for this market to reach a size of more than $300 billion.

How to Invest in Innovation?

Given that there are hundreds of innovative companies out there and the success rate is concentrated to only a tiny portion of the group, it is essential for investors to diversify their holdings. This is especially true given that the path to success is quite bumpy for even the largest and most successful companies, with the best evidence of this being the turbulent climb to the top and bifurcated returns of the Internet and Communications stocks of the ‘90s. The solution to this issue is investing through Innovation-focused ETFs and mutual funds, allowing one to participate in the upside of innovation, without taking on the significant risk of picking the laggard or company with a fatal flaw in an emerging industry. A search on Magnifi indicates numerous ways for investors to access Innovation with low fees.

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The information and data are as of the July 23, 202 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

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