Best sectors for innovation exposure

Investors looking to enhance their portfolios can consider increasing their exposure to innovation.

“Many Canadians have a lot of their wealth tied up in the Canadian market,” said Ryan Diamant, client portfolio manager, equities, with CIBC Asset Management. But the TSX composite index has few “dominant” tech companies, he noted, and its health-care sector largely comprises marijuana stocks.

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“Canadians have the opportunity to increase their exposure to … innovation,” he said.

The tech and health care sectors provide the best opportunity for innovation, Diamant said, with each providing a different type of exposure.

The tech sector, including information technology and communication services, tends to provide investors with more upside.

“These companies are creating new, innovative and disruptive technologies that create an entirely new market for the companies,” Diamant said, citing the example of Nvidia, which supplies chips for artificial intelligence. “There are very few other competitors [of Nvidia] that are able to catch up.”

The health-care sector provides defensive growth. The sector has consistently demonstrated resilience during market downturns, strengthened by government spending, research and development, and aging demographics across developed nations, Diamant said.

“Health care protected in all the last five market corrections,” he said, including the 2022, Covid-19 and financial crisis drawdowns.

He suggested combining technology and health-care investments, respectively, in a 60/40 portfolio.

“Technology provides that upside exposure, and health care provides more risk-adjusted returns,” he said. 

Such an innovation portfolio of 60% tech and 40% health care had superior risk-adjusted returns over the past decade relative to broader global equities, and has returned approximately 600 basis points annualized, Diamant said.

While an investor could use an index such as the Nasdaq for innovation exposure, he said the Nasdaq has two key drawbacks.

The index is “designed to provide non-financial company exposure,” he said. “So, while it does have a significant amount of technology and health care, it’s not true innovation exposure.”

He also highlighted the Nasdaq’s concentration. Since 2016 the top 10 holdings have at times accounted for up to 60% of the index.

“When you’re that concentrated, it could create a situation where you’re magnifying returns on the upside and the downside,” Diamant said.

In contrast, a balanced 60/40 tech and health-care portfolio, though it may at times underperform in absolute terms compared to the Nasdaq, offers higher risk-adjusted returns. 

“A 60/40 portfolio compensates for risk taking better than something like the Nasdaq,” Diamant said.  

This article is part of the Advisor To Go program, powered by CIBC Asset Management. It was written without input from the sponsor.