Artificial intelligence (AI) has the potential to become the most significant productivity enhancer for the global economy since electricity. It is estimated that electricity contributed a 30.6% increase in labor productivity for global gross domestic product over 32 years¹ compared with a hypothetical baseline where this technological advancement never happened.² AI can potentially surpass that.

Historically, productivity-enhancing technologies are often associated with speculative stock market bubbles. Investors must navigate any potential speculative bubbles responsibly by capturing the upside and mitigating the downside. Active management can make a big difference in these situations.

It’s tempting to compare this infrastructure cycle with the telecom bubble of the late 1990s, but there are many meaningful distinctions. Most notably, this current cycle is funded by the most profitable companies in history—the hyperscalers. These companies operate as natural monopolies, and only at their scale has it even been possible to invent, develop, and finance the significant changes driven by AI. The paradox is that while AI was only possible due to the hyperscalers’ enormous power and scale, AI also initiates the very technology transition that could potentially disrupt the existing businesses of these natural monopolies. This implies that the infrastructure investments are both offensive and defensive and could continue longer than the market expects.

So far, the majority of economics associated with this infrastructure boom have accrued to the digital semiconductor industry. However, there has also been a noticeable boost in revenue growth for digital advertising and software companies due to this spending. As time progresses, AI applications will likely continue to evolve and revolutionize various domains within the expansive field of technology. 

We are at the “end of the beginning” of the current AI investment cycle, and we have entered the period of deceleration, as year‑over‑year growth in capital expenditures from the hyperscalers has likely peaked. This does not mean these companies aren’t growing rapidly from here; rather, they’re just growing at a slower pace than the incredible rate they were a few quarters ago.

Additional growth areas include e-commerce and digital payments

While past the phase of fastest growth for the industry, there are still many years ahead for this AI megatrend; we are at the “end of the beginning” and not yet at the “beginning of the end.” The AI chip market is growing from USD 45 billion in 2023 to USD 400 billion in 2027 and USD 500 billion in 2028.³ With a strong investment framework and research process, T. Rowe Price can adapt to this evolving AI landscape and take advantage of returns throughout all phases of the investment cycle. This is where active management matters.

Additional areas of opportunity include:

• Global e-commerce
  This industry is growing as online retail gains more market share from offline retail. This trend is global, and T. Rowe Price’s extensive equity research team helps identify linchpin companies worldwide that will benefit from it.
• Digital payments
  These companies bring a software approach to financial services, resulting in lower costs and higher profitability and opening parts of the global payments industry that were previously inaccessible due to high costs.

There are technology-enabled companies all around the globe that benefit from these two megatrends, including Amazon, Visa, Adyen, Shopify, Alibaba, Sea, PDD Holdings, Mercado Libre, Coinbase, and NU Holdings. 

Shifts in the passive ETF landscape bring more opportunity for active investors

The Global Industry Classification Standard (GICS) underwent several changes in 2018, including renaming the telecommunications services sector to communication services. This shift reclassified companies such as Meta and Alphabet from the information technology (IT) sector into this new category. This had several implications:

• Confusion among investors who want to allocate to “technology stocks.”
• Concentration issues in the IT sector, as nearly half of the index is now dominated by just three companies: Apple, Microsoft, and NVIDIA. Pure IT exchange-traded funds (ETFs)—such as the Technology Select Sector SPDR^® Fund, the Vanguard Information Technology Index Fund, and the iShares Global Tech ETF, must now face this incredible concentration problem. (Figure 1)
• Active and thematic ETFs do not follow traditional GICS sector classifications.
• While most technology-oriented ETF assets are still in the IT sector, new categories such as thematic disruptive tech and thematic multi-sector capture a broader technology landscape and include many active ETFs. (Figure 2)
• These newer ETF categories give investors greater flexibility to choose investments that better suit their views on “technology” stocks.

Are the “Qs” investing in what you think they are?

For many years, the Invesco QQQ ETF Trust (ticker: QQQ) has been strongly associated with technology stocks. With nearly USD 300 billion of assets under management (AUM) at 20 basis points,⁴ it is the standard against which all technology investments, public and private, are measured. However, despite its significant emphasis on technology, it is not a technology ETF.

QQQ mirrors the performance of the Nasdaq-100 Index^®, which includes 100 of the largest nonfinancial firms listed on the Nasdaq Stock Market. Consumer staples, health care, industrials, materials, utilities, and energy compose approximately 20% of the index.⁴ (Figure 3) At the individual stock level, companies such as Costco, T-Mobile, PepsiCo, and Linde may be among the top 20 holdings—making up about 8% of the index. Investors looking for pure exposure to technology companies may want to consider whether the Qs can consistently deliver this over time.

A disciplined, strategic approach can identify critical opportunities

Our fundamentally driven investment strategy sets the T. Rowe Price active Technology ETF (TTEQ) apart from passive alternatives. We can tactically recognize change, disruption, and extreme outcomes for companies, which we believe provides the opportunity for positive returns.

Our framework seeks companies that:

1. Sell mission-critical, linchpin technologies. These are technologies that make their users’ lives dramatically better. 
2. Innovate in secular growth markets. We want to invest in companies that are gaining share in fast-growing end markets.
3. Have improving fundamentals. We look for revenue that is accelerating, operating margins that are expanding, or free cash flow conversion that is improving. We are focused on improving fundamentals over the next 12 to 18 months.
4. Have reasonable valuations. TTEQ is valuation-aware. We aim to avoid cheap, yet broken, technology stocks. However, we also aim to avoid overpaying for exceptional companies where the stock price cannot compound in line with its underlying growth because of its starting valuation.

Our investment framework, alongside the analysis, insights, and industry expertise of T. Rowe Price’s exceptional team of in‑house analysts covering technology firms worldwide, results in a portfolio distinctively poised to identify standout tech companies with improving fundamentals.

Advantages of the T. Rowe Price Technology ETF

• Portfolio design. Technology‑related companies make up an increasing share of diversified market cap‑weighted benchmarks. TTEQ’s strategic design brings exposure to one of the largest and fastest‑growing subsectors across the globe.
• Broadened industry exposure. TTEQ can invest in enduring technology‑enabled companies, beyond those just classified in core “information technology,” including those in consumer discretionary, communication services, or financial services.
• Broadened geography exposure. TTEQ will primarily invest in U.S. companies, but it will also have exposure across both developed and emerging markets. Many investors often overlook the importance of mission-critical, linchpin international companies. We believe the growth potential of technology markets outside the U.S. is frequently underestimated, with numerous innovative companies in Latin America, Europe, and Asia completely transforming their regional economies. Our global research capabilities give us a differentiated edge in accessing this broader set of alpha opportunities.
• Concentrated, yet diversified. Given the immense size of the mega-cap companies in most technology benchmarks today, investors may find themselves overly concentrated in these select few names. TTEQ generally aims to limit individual position sizes to 10% or less and intends to manage a portfolio comprising 40 to 50 stocks.
• Framework-based approach: Passive investing is simply a rebalancing strategy, where the passive portfolio is adjusted to align with the underlying index at specific time intervals or based on rules regarding portfolio concentration. Conversely, TTEQ employs a framework-based strategy and is designed to outperform the index.