By John Feyerer, Senior Director of Equity ETF Product Strategy, Invesco.

John Feyerer, Senior Director of Equity ETF Product Strategy, Invesco.

Ask just about any investor about innovation, and the first word that comes to their mind will likely be “technology.”

While sector-specific technology companies have obviously played a central role, the evolution of technological solutions across all industries means that innovation has truly become ubiquitous in investors’ everyday lives.

Consider the auto industry: Today’s average car has more computing power than the first space shuttle did. Or look at medicine: Biotechnology and other health care companies increasingly rely on bioinformatics, as tremendous strides have been made in gene mapping and analysis to promote more efficient diagnoses and treatments of disease.

Supply chain management has also welcomed technological improvements, from the use of automation and robotics in warehouses to ensuring greater transparency across the delivery cycle.

In short, we have all watched innovation and ingenuity play out across industries, rather than solely within a singular technological ecosystem, with dramatic effects on the ways we live, work, and play. Investors have recognized the enormous role of technology and the way it has fundamentally changed our daily lives. Accordingly, many investors are now looking to the stock market to invest in this kind of transformative innovation — but how can they quantify just how innovative a company is?

Research and development: A demonstrated measure of innovation

One way to measure innovation (and the ability to innovate) is a company’s commitment to consistently reinvesting in research and development. The chart below compares the total dollars invested in research and development, as well as the reinvestment rate measured as a percent of total sales over the past three years for the NASDAQ-100 (the 100 largest non-financial companies that trade on the NASDAQ), the S&P 500, and the Russell 1000 Growth indexes.

From 2017 through 2019 the constituents of the NASDAQ-100 spent considerably more on research and development, both in terms of absolute dollars as well as when measured as a percent of sales (Exhibit 1). This discipline has paid off with the NASDAQ constituents generating considerably higher growth rates across revenue, earnings, and dividends relative to these other indexes over the past 10 years (Exhibit 2).

Source: Invesco.

Source: Invesco.

Similarly, the NASDAQ Next Generation 100 Index (NGX), which is comprised of the largest 100 non-financial companies outside of the NASDAQ-100, also demonstrates a consistent commitment to research and development.

Across the last 10 years, constituents within the NASDAQ Next Generation 100 Index consistently reinvested in research and development as a percent of revenue at a rate that was often a multiple of the rate of those constituents from other benchmark indexes including the S&P MidCap 400, the S&P MidCap 400 Growth, and the Russell Midcap Growth indexes (Exhibit 3).

Source: Invesco.

Through the years, this consistent commitment to R&D by the constituents of the NASDAQ Next Generation 100 Index has resulted in a number of companies that have grown to point of joining the NASDAQ-100 Index — companies such as Tesla Motors, Netflix, MercadoLibre, and DocuSign to name a few.

As of the end of September, over one-third of the constituents of the NASDAQ-100 were at one point a member of the NASDAQ Next Generation 100 Index (Exhibit 4).

Source: Invesco.

A new way to access innovation

Through our partnership with NASDAQ, Invesco has redefined the way investors can access innovative companies with a commitment to research and development. Our new QQQ Innovation Suite offers access to the NASDAQ-100 and the NASDAQ Next Generation 100 indexes, both of which invest in some of the most innovative growth companies in the world (including market leaders such Apple, Microsoft, and Amazon, and emerging innovators such as Roku, Marvell Technology Group Ltd., and Garmin).

Once small entrepreneurial start-ups, these companies have continued to consistently and significantly invest in research and development — and in doing so have redefined themselves, their sectors, and the face of innovation itself.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)