A Growth Opportunity in a Next-Gen Internet ETF Strategy

Investors should look to the expansion of cloud computing, along with a next-generation internet sector-themed exchange traded fund strategy to capture this growing opportunity.

In the recent webcast, An Advisors Guide to Cloud Computing and the Future of the Internet, Analyst Will Summerlin projected that global A.I. software and hardware could explode in the coming years with spending more than triple the consensus expectations by 2030.

Meanwhile, Summerlin anticipates artificial intelligence to scale from almost $2.5 trillion to $2.7 trillion in enterprise value by 2030. Specifically, by 2030, A.I. software companies could produce $14 trillion in annual revenue collectively, and the resulting $4 trillion in free cash flow could create over $80 trillion in enterprise value, up from $2.3 trillion in 2021. Meanwhile, A.I. hardware companies could produce $1.7 trillion in annual revenue collectively, and the resulting $350 billion in free cash flow could create $7 trillion in enterprise value.

Summerlin argued that our increased reliance and utilization of the internet is continuing to fuel this growth toward a more digital lifestyle. The COVID-19 pandemic has only served as a catalyst to accelerate the shift from offline to online activities.

“We estimate that on average in 2021, internet users spent 38% of their free time online and 62% offline. By 2030, we expect these averages to flip, with users spending 52% of their free time online and 48% offline,” Summerlin said.

Meanwhile, digital advertising will play a large role in connecting consumers with new products in the expanding online environment. By the end of 2021, global digital advertising totaled roughly $440 billion, or 62% of the total advertising market.

“We believe the global digital advertising market will grow over the next eight years,” Summerlin added.

Looking ahead, Summerlin contended that social commerce gross merchandise value will support the next wave of online shopping with the network effects of social media. Social commerce gross merchandise value is expected to grow over the next five years to $3.7 trillion in the ongoing digitization of commerce.

Additionally, Summerlin added that games are quickly becoming the new social platforms or so-called social gaming.

“We estimate that video game content and services will grow from roughly $200 billion in 2021 to more than $400 billion by 2026 with the rise of virtual worlds,” Summerlin said.

Overall, Frank Downing, at ARK Invest argued that revenue associated with discretionary online time will rise from $1.8 trillion to $4.1 trillion in 2026 through the expansion of entertainment spending, advertising and platform e-commerce fees.

Downing also underscored blockchain technology as a catalyst for several revolutions in our economy.

“In our view, the Bitcoin protocol created the most profound application of public blockchain infrastructure. In addition to the money revolution, public blockchains also have catalyzed financial and internet revolutions,” Downing said.

Specifically, it has revolutionized money by allowing the coordination of value transfer and property rights outside the purview of centralized authorities, governments, and top-down control. Blockchain has created a financial revolution by supporting the coordination of financial services and contracts outside the purview of traditional financial institutions. Lastly, it has revolutionized the internet by aiding the coordination of identity, reputation, and data outside the purview of traditional media conglomerates and big tech.

“We believe Web3 virtual ecosystems will thrive if online human participants can own — as opposed to use or rent — digital assets,” Downing said, adding that “public and decentralized blockchains allow users to store and trade their assets in a legitimate secondary market.”

For example, Downing pointed to the ownership of digital assets like non-fungible tokens or NFTs that serve as smart contracts that verify the ownership of digital assets on public blockchains.

As a way to access these growing opportunities, investors can turn to the actively managed ARK Next Generation Internet ETF (ARKW). The ETF is comprised of companies that are focused on and expected to benefit from shifting the bases of technology infrastructure to the cloud, enabling mobile, new and local services, such as companies that rely on or benefit from the increased use of shared technology, infrastructure and services, internet-based products and services, new payment methods, big data, the internet of things, and social distribution and media. These companies may develop, produce or enable businesses associated with cloud computing, cyber security, e-commerce, big data, artificial intelligence, mobile technology, internet-of-things, social platforms, blockchain, and peer-to-peer.

The ETF strategy offers exposure to innovation through thematic multi-cap exposure to innovative internet technologies. It may also offer growth potential through capturing long-term growth and low correlation of relative returns to traditional growth strategies and negative correlation to value strategies.

The strategy is grounded on research by combining top-down and bottom-up research in its portfolio management to identify innovative companies and convergence across markets.

Financial advisors who are interested in learning more about innovation in the internet space can watch the webcast here on demand.

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