Science fact or fiction investing?

We live in hyperstitious times.

A philosopher named Nick Land coined the word hyperstition in the 1990s, describing the sense of living today in science fiction of the past.

Investors may have that same sensation, given the dominance of artificial intelligence in their portfolios.

Yet AI is arguably more than an advanced chat-bot/search engine. It is “the fabric that’s binding” together a lot of other science fiction-like technologies, moving them closer to viable commercialization, says Mickey Ganguly, associate portfolio manager for the CIBC Technology Innovation Fund.

Quantum computing is among those exciting areas of innovation advancing more quickly from AI. Investors have a handful of publicly traded companies to choose from, including Canadian firms Xanadu Quantum Technologies Inc. and D-Wave Quantum Inc, which have modest revenues.

Leveraging theories in quantum physics, quantum computers are estimated to be 158 million times faster than the best supercomputer today, an Accenture report notes, but the technology is nascent and far from widespread adoption, Ganguly says.

Space exploration is another new stock market corner where real science and science fiction intersect.

SpaceX Technologies Corp. will soon list on Nasdaq, forecast to have a market value of more than US$1.5 trillion. Investors can already get space exposure through firms like Rocket Lab USA Inc., a leading provider of rockets and satellites.

Rocket Lab already has hundreds of millions in annual revenues, though it still loses money. Even still, it has a lofty share price, relative to its financials, reflecting investors’ hopes.

Electric vertical take-off and landing (eVTOL) aircraft (think flying cars) companies — like Joby Aviation and Archer Aviation — also have sky-high valuations and much less revenue. Investors — including major aerospace companies — in these electrified aircraft companies see the potential to make air travel emission-free and largely automated.

The challenge for intrigued investors is separating scientific fact from fiction, says Kenneth Lamont, principal researcher at Morningstar specializing in emerging technologies, based in London.

“You may be completely correct on the importance of a new technology, but the horse you bet on could just fizzle out for the wrong reasons.”

Those aforementioned companies involve tremendous “hype” about future markets that are not yet built out, and attract more retail than professional investors, he adds.

That said, potential should not be entirely ignored.

The most innovative companies often do outperform long-term, says Terry Dimock, chief risk and execution officer at National Bank Investments in Montreal. “If you look over the last 20 years, companies that have really invested well in R&D have generally outperformed other companies.”

He further points to JP Morgan research showing that companies spending the most on research and development outperform by an average of three percentage points annually.

Top-rated innovation and technology funds like National Bank’s NBI Innovators Fund (four out of five stars by Morningstar) and CIBC’s Technology Innovation Fund (four stars) offer investors a diversified, risk-adjusted means to gain exposure to innovative companies.

That said, their top-10 holdings — which make up the majority of the overall portfolios — do not differ substantially from the top holdings of the Nasdaq 100 or S&P 500.

In turn, an investor could invest in a passive exchange-traded fund (ETF) tracking the Nasdaq 100 using the Invesco QQQ Trust ETF (rated five stars by Morningstar), which modestly outperformed them over the last five years with a management cost a fraction of the other funds.

One challenge is QQQ offers little exposure to flying electric cars, space companies and quantum computers. CIBC’s and National Bank’s funds do not hold these nascent technology companies in their top 25 holdings either. (That is based on regulatory filings; it’s unclear if these companies are held as smaller positions in those funds.)

A new ETF — Global X NYSE 100 Index ETF — does include a few of these companies.

“It captures a lot of tech firms that, while not small anymore, follow the typical pattern of emerging technologies — some revenue and often negative earnings,” says Ken Chen, Toronto portfolio manager for index strategies at Global X Canada.

“But they are pushing the edge of technology.”

The ETF’s top-10 holdings also look like the other funds, holding semiconductor maker NVIDIA Corp. and Microsoft Corp. among other tech giants. But its portfolio also includes Rocket Lab and D-Wave — though the exposures are less than one per cent of the portfolio.

More risk-embracing individuals can invest in the individual companies. “But your money can be destroyed quickly if you take too much risk,” Dimock cautions, adding this strategy should involve a sliver of an overall portfolio.

High risks aside, some investors may still want to roll the dice, and hindsight can be instructive.

Consider how ubiquitous technologies like smartphones and the internet were once innovative but not wildly profitable business models 30 years ago.

The difference today is AI is an accelerator for these technologies. Consider robotics, paired with agentic AI (effectively computers making decisions and taking action on their own), Ganguly says.

“One day, robots may do your chores, feed your cat and take care of you if you’re sick,” he says.

Electric car maker Tesla leads in AI-powered robots.

Yet smaller companies like Serve Robotics, which manufactures autonomous delivery robots and plans to commercialize robots for hospital use, also trade on the Nasdaq.

These speculative, albeit “sexy” new technologies often involve very long timelines to profitability at best, if they ever become profitable, Lamont says.

He adds boring, passive ETFs tracking broad indices like the S&P 500 — which will likely hold the winners in these emerging technologies one day — are likely to be more profitable in the long run.

“Taking a page from the Warren Buffett school, the least sexy investments often turn out to be the best ones.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com