While many of the most successful companies reside in the technology sector, the recent downturn demonstrates that tech investing also comes with risk.

Rising inflation and interest rates are placing new pressure on the sector, which has soared in recent years. Ongoing supply chain constraints, including most notably with semiconductor chips, are also playing a role following the COVID-19 pandemic.

But while investor demand has momentarily cooled, the fundamentals of the largest tech and tech-related companies remain robust.

Those companies continue to deliver sustainable earnings due to their established and competitive business models. The challenge for investors is to identify those companies while diversifying their risk in an efficient way.

Asia is the world’s tech engine room

While US consumer-focused tech brands receive the bulk of the attention, their success is based upon companies based in Asia that supply key, critical components.

For example, Taiwanese and Korean companies account for the bulk of global processor chip production and memory chip output – components that power many common devices including smartphones.

This type of investment has some similarity to selling shovels in a gold rush. As technology end product sales continue to grow, the suppliers of those key inputs will also benefit.

Similarly, the continued growth in the electric vehicle (EV) market will be powered by companies in Asia, which is home to many EV battery manufacturers.

A growing number of companies across Asia are also building out their consumer-focused applications, joining long-time providers of these services such as China tech conglomerate Tencent and internet company Baidu.

Investors who limit their tech exposure to one country are less diversified, leaving them exposed to country-specific regulatory or economic risks. Diversification across multiple countries within a region is more likely to result in better risk-adjusted returns over time.

Technology extends beyond traditional tech sector companies

Technology is increasingly reshaping non-technology sectors. For example, traditional photography companies were once dominant in their industry until the advent of digital technology caused their products to be replaced by smartphones.

Today, a range of new companies are redefining their businesses with technology. US listed companies such as Disney, Snap and Uber are categorized as entertainment, social media and transport companies, but their success relies on technology.

The same holds true for many Asian companies. Companies categorized as consumer discretionary, such as Chinese e-commerce company Alibaba, online food delivery service Meituan, and Japanese conglomerate Sony Group, all rely heavily on technology, as do media and communications companies such as Chinese conglomerate Tencent and Korean tech platform NAVER.

The impact of innovation through technology will continue to cut across multiple sectors, redefining the very concept of a tech company. Investors with a narrow definition would miss out on the diversification benefits that these tech-enabled companies can offer.

Building a smarter index

A passive, index-based approach provides a low-cost and efficient way to allocate to technology stocks. However, most traditional technology indices are limited by geography and legacy sector definitions.

The ICE Asia Tech 30 Index (ICEAT30) allocates to the 30 largest technology and tech-related companies listed across multiple Asian countries such as Hong Kong, Japan, South Korea, and Taiwan. The index applies weight constraints to limit the maximum exposure to one company, resulting in a more diversified composition. Further, the index methodology includes selected sub-industries found in other traditional sectors such as Consumer Discretionary and Media & Communications, to ensure it is representative of the broad technology-related set of industries.

This index methodology design ensures that the resulting basket of stocks is liquid and diversified. Investors can currently obtain exposure to the ICE Asia Tech 30 Index by investing in the Micro Asia Tech 30 Index futures contract traded at ICE Futures Singapore.

The diversified and broad approach of the index provides an important tool for investors to help manage risk while tapping into the technology sector’s ability to drive innovation, productivity, and corporate profits over the coming decades.