Advances in artificial intelligence, automation and technology that fuse the physical, digital and biological worlds are ushering in a new period of industrial transformation that is referred to as The Fourth Industrial Revolution. It is rapidly redefining existing industries and reshaping our way of life.
One significant trend emerging as part of the Fourth Industrial Revolution is smart transportation, which is also referred to as smart mobility. Technological innovation is fundamentally changing the concept of travel and transportation. A new era of transportation that could move people and goods faster, cheaper and more efficiently is emerging through autonomous vehicles, mobility sharing and drones. This innovation, illustrated below, will not only transform our way of life, but also provide a secular growth opportunity for investment portfolios.
The rise of smart transportation: Autonomous vehicles, mobility sharing and drones
The adoption and growth of autonomous vehicles, mobility sharing, and drones have the potential to drastically change day-to-day transportation as we know it.
- Autonomous vehicles. Technical developments, shifts in regulation and public perception will dictate the progress on commercializing autonomous vehicles. Once those hurdles are overcome, McKinsey & Co. estimates, under a high-disruption scenario, partially or fully autonomous vehicles will account for 65% of passenger vehicles sold globally by 2030.1
- Shared mobility. Shared mobility, including ride sharing (e.g. Lyft and Uber) and car sharing (e.g. Zipcar), will also expand the revenue pool of the smart transportation industry. Revenue in ride sharing businesses currently amounts to $59.7 billion worldwide today. Revenue is expected to grow 16% annually, reaching $109 billion in 2022.2 Software-based and data-driven mobility sharing services also create additional demand for vehicle connectivity services, such as navigation, vehicle tracking, remote control and software upgrades.
Together, autonomous vehicles and shared mobility are expected to drive the automotive industry growth over the next decade. The chart below captures this projected expansion.
- Drones for commercial and civilian usage. Drones are evolving beyond military origin and into the commercial and civilian space. For businesses and consumers, drones are becoming an option for quick delivery and pickup, while governments continue to explore new ways to implement this technology. Last November, the Department of Transportation launched a pilot program allowing states to test new types of drone operations, including package deliveries. According to Goldman Sachs Research, spending on commercial/civilian drones is estimated to reach $13 billion between now and 2020.
Investing in smart transportation's potential
As the Fourth Industrial Revolution reshapes society, it means taking a new approach to sectors and industries. Kensho Technologies, a data analytics and machine intelligence company, has created indices designed to capture not only the leading companies in each industry but also the entire ecosystems supporting them. By starting with an unrestricted universe, not constrained to a traditional Global Industry Classification Standards (GICS) framework, and leveraging Kensho’s Natural Language Processing (NLP) technology, these indices are dynamic, forward looking, and may be better positioned to identify companies involved in the entire ecosystem fueling this new economic paradigm.
That is why we partnered with Kensho to develop our SPDR® Kensho ETFs. SPDR Kensho ETFs aim to capture US-listed firms whose products and services are driving innovation behind the industries and sectors at the heart of the Fourth Industrial Revolution. In particular, the SPDR® Kensho Smart Mobility ETF (XKST) seeks to capture the entire range of companies whose products and services are spurring advances in smart transportation, including those involved in autonomous vehicles, shared mobility and drones for commercial and civilian usage.
XKST's Top 10 holdings illustrate this unconstrained, dynamic and forward looking exposure aiming to capture an entire and expansive universe of firms engaged in smart transportation, and not just the few well-known stalwarts making headlines. Not to mention a few traditional transportation companies that, behind the scenes, are making inroads into a smarter form of travel.
Here are three examples from the top 10 holdings to showcase this:
- The top holding is Avis Budget Group, a familiar name for anyone who travels and needs to rent a car. However, the reason as to why they are included in a Smart Mobility exposure is that they own ride-sharing service Zipcar and have also entered into an agreement to provide maintenance service for Waymo’s (owned by Alphabet, the parent of Google) self-driving car fleet.
- Another example is the 10th holding, Fiat Chrysler Automobiles. One may ask, how can a company (Chrysler) founded in 1925 be considered “smart”? The answer lies in the fact that even autonomous vehicles need a vehicle to program, and Fiat Chrysler has agreed to partner with Waymo as its automobile supplier. It has also agreed to partner with BMW, Intel, and Mobileye to develop autonomous vehicles.
While those two companies are “traditional” transportation firms, the last example reinforces the unconstrained nature of Kensho’s methodology and how it seeks to capture the full ecosystem.
- Nvidia Corp is the second largest holding even though under the “traditional” GICS framework it is classified as a Technology firm. Under the Kensho classification, it recognizes that the technology powering the ability to create a driverless car requires semiconductors, microprocessors, and advanced software. Nvidia, a leading semiconductor firm within the Technology sector, provides these capabilities and has partnered with Uber and Volkswagen on their autonomous vehicle ventures.
There are more examples of the deep reach the Kensho approach has to capturing the full breadth of companies fueling the rise of smart transportation. The top 10 holdings, at the very least, show how XKST can veer beyond what might be considered “traditional” transportation sector holdings and own the companies—like ride-sharing firms and automobile software companies—that are helping propel the evolution of the transportation industry.
At State Street Global Advisors, we are keeping a close eye on emerging Fourth Industrial Revolution trends and providing investors with the tools necessary to capitalize on this revolution. Follow SPDR Blog to keep on top of these trends.
1Automotive Revolution Perspective Towards 2030, McKinsey & Co., 2016
2Statista, Worldwide Ride Sharing Projection
Global Industry Classification Standard (GICS)
A financial industry guide for classifying industries that is used by investors around the world. The GICS structure consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries, and Standard & Poor’s (S&P) has categorized all major public companies into the GICS framework.