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It’s often said that disruptive, innovative companies deliver strong returns to investors and data confirm that is true. Of course, disruption and innovation must be “born” somewhere and it’s accurate to say those are the “children” of research and development (R&D).
Indeed, R&D is big business. It drives trillions of dollars in economic output every year on a global basis. It’s applicable across all industries, though biotech/pharmaceuticals and technology are the not surprising leaders when it comes to R&D expenditures.
“What do organizations expect to get in return? At the core, they hope their R&D investments yield the critical technology from which they can develop new products, services, and business models. But for R&D to deliver genuine value, its role must be woven centrally into the organization’s mission,” according to McKinsey. “R&D should help to both deliver and shape corporate strategy, so that it develops differentiated offerings for the company’s priority markets and reveals strategic options, highlighting promising ways to reposition the business through new platforms and disruptive breakthroughs.”
Point is R&D is the lifeblood of smart companies and while it’s not an investment factor in the traditional sense of the phrase, it is something savvy investors need to evaluate. A new exchange traded fund could help in accomplishing that objective.
Consider RND for R&D
The First Trust Bloomberg R&D Leaders ETF (RND) is the ETF mentioned above and it came to market last week. RND tracks the Bloomberg R&D Leaders Select Index – a benchmark that takes steps to ensure some level of R&D purity.
For example, RND’s index mandates that member firms must have increased R&D spending for at least three straight years while residing in at least the 90th percentile of the Bloomberg US 1000 Index in terms of R&D Expenditures to Sales Ratio. From there, the top 50 stocks by market value are selected.
“The First Trust Bloomberg R&D Leaders ETF provides exposure to companies that seek to return implicit value to shareholders by reinvesting in their own growth. The fund aims to include companies that have consistently increased their research and development (“R&D”) expenditures for at least three consecutive years and that have a meaningful portion of their sales devoted to R&D expenditures,” according to the issuer.
One takeaway from that is RND is a thematic ETF and it is. However, R&D is arguably a more pertinent, viable theme than what’s addressed by many other funds in this category. RND could solve some of the conundrums associated with thematic ETFs.
A challenge investors face, without proper guidance, is knowing how to deploy thematic ETFs within their portfolios. Some don’t have enough thematic exposure or any at all while others may be too cavalier and overly allocated to such strategies. On that note, advisors can help clients balance the risk and return opportunity set thematic funds present.
RND Lives Up to R&D Billing
RND may be thematic, but the rookie ETF isn’t exotic. Top 10 holdings including Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA) and Microsoft (NASDAQ: MSFT), among others, confirm as much.
While not exotic, RND lives up to its billing as haven for companies with clear commitments to R&D – a trait that’s paid off for long-term investors in those firms.
“Over time, the continual growth of R&D expenditures may contribute to greater sales and net income growth for these businesses as compared to the market,” adds First Trust. “The average R&D spending for companies in the Bloomberg R&D Leaders Select Index far outpaces that of the average U.S. companies’ R&D spending, as represented by broad U.S. benchmarks.”