Invest in Innovative and Disruptive Companies with AB ETFs
Key Takeaways
- Innovation offers potential profitability and growth—but not every innovative company is a good investment opportunity.
- From relentless culture to distinctive products and competitive moats, true disruptors have a distinctive formula for long-term success.
- Picking innovative companies to invest in is difficult. The AB Disruptors ETF actively invests in innovative market leaders poised to disrupt their industries.
Innovative doesn’t necessarily mean investable. Firms may win early in paradigm changes only to later be disrupted themselves. Companies dedicated to making chips for WiFi, Bluetooth and GPS early in the smartphone cycle were later disrupted by integrated leaders such as Broadcom and QUALCOMM.
The same goes for AI data centers. As AI architecture evolves, the gap between transitory winners and long-term leaders with defensible competitive moats and pricing power will likely grow, as was the case between the hundreds of internet startups and the few internet survivors. It’s critical to actively monitor and manage opportunities in AI data centers.
Finding the Right Innovation—and the Right Company Behind It
The diverse beneficiaries of innovative breakthroughs and applications span healthcare, consumer retail, media, financials, energy and industrials. But what ingredients make a long-term opportunity?
The ability to thrive amid further disruption. Companies should be able to endure further disruption over time. They never stop innovating, continually reinventing themselves and introducing unique features or attributes in products, services or processes.
Innovation with lasting profit potential. Some innovation is evolutionary, creating a better experience or more efficiency (ride-sharing models or hybrid cloud infrastructure). And some is breakthrough (synthetic biology, electric vehicles (EVs) or true AI and autonomous driving). The key is enduring profit potential.
Markets seeking distinctive offerings. Investable disruptors have big markets hungry for distinctive products that foster durable profits and high entry barriers. Firms with network effects are especially attractive. The internet age saw digital network effects in social media and ride sharing—more users boosted the per-user value proposition. We expect the AI revolution to produce tech-enabled physical network effects.
For example, Tesla’s huge network of drivers sharing video data means better-trained full-self driving, which could bring more adoption and drivers. This moat helps Tesla lead in autonomous transportation. In our view, the race to become the GenAI leader broadly follows the same principle: bigger datasets and higher computing scale should drive more robust results and greater adoption.
The sweet spot of innovation. There’s fertile ground in the rapid-growth phase of innovation, when adoption rates of new technology reach inflection points and increase sharply. It takes time to reach that phase, but when it begins, the path points steeply upward. We’ve seen this in smartphone adoption and streaming media. And we see it today in EV adoption, robotics, cloud computing (Display) and digital payments.
Hyperscalers’ Revenue is Expected to Grow at a Rapid Speed
Analysis provided for illustrative purposes only and is subject to revision.
As of October 31, 2024
CAGR, or compound annual growth rate, is calculated from 2013 through 2025E.
Source: Bloomberg and AllianceBernstein (AB)
Strong management teams. Exceptional management teams with focus and vision are essential to guiding innovative companies. These teams never seem to overlook competitive threats. They’re hyperaware of peers and willing to “self-disrupt” processes to stay ahead.
It’s all about the magnitude of surprise. Stock potential is highest when investors underestimate growth potential and the profit pool. This has happened with transformative innovation like the smartphone or even the original internet, creating alpha1 potential. Some innovators may have high valuations but lower near-term profits from investing to reach dominant scale or keep a competitive moat. They may seem expensive today, but if well-spent capital accesses greater growth potential, it could be worth it.
AB Disruptors ETF (NYSE: FWD): Capturing Disruptive Opportunities…Thematically
Powerful megatrends and a new economy with a thriving digital infrastructure are fueling an “industrial revolution” of innovation. But investing in innovation requires disciplined active management.
That’s where the AB Disruptors ETFcomes in. It seeks to outperform global growth equity markets by investing in innovative market leaders poised to disrupt their industries. FWD combines top-down thematic research with rigorous, bottom-up fundamental analysis and robust risk management.
If you’re an investor looking for trading guidance, the AB ETF Capital Markets team offers complementary trade advisory services. You can reach us at etf.capitalmarkets@alliancebernstein.com. And you can find out more about AB’s actively managed ETFs here.
How to Take Action
1Alpha measures risk-adjusted “excess returns” over a benchmark.
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