For Apple (AAPL), the huge success of products like the iPhone and iPad is a tough act to follow. Given that fact, what is the next technology Apple CEO Tim Cook is most excited about? The answer is augmented reality, or AR, which overlays images, videos, and games on top of real-world experiences.

Cook has likened the potential of AR to that of smartphones. He predicts that in the future, we will all have “augmented reality experiences every day, almost like eating three meals a day. It will become a big part of you.”

That’s a pretty bold prediction, but Apple’s track record as a technology innovator is unmatched. And it has supporting data to back it up. Research firm Global Market Insights anticipates the global market for AR products to grow at a CAGR of 81% to $165 billion by 2024.

Augmented vs Virtual Reality

Augmented reality is the lesser known relative of virtual reality. Virtual reality completely immerses the user in an artificial world that has an obvious attraction for gamers. While VR headsets like Facebook’s (FB) Oculus and Samsung’s Gear (OTCPK:SSNLF) are exciting niche products, they’re hardly “transformational.” On the other hand, wearable AR devices actually have the potential to become mainstream products that could even replace the smartphone.

One of the key differentiators between VR and AR is that augmented reality, as its name suggests, is not fully immersive. It does not replace or interrupt reality, it enhances or “augments” it. Apple initially intends to add AR features and functionality to the next generation of iPhones. But ultimately, it plans to release wearable AR glasses.

Current implementations of AR glasses are underpowered, lacking in functionality, and just plain “clunky,” but Apple is known for its innovation in slim, seamless, and rugged design. If Apple can find the balance between function and fashion, will succeed where others like Google (GOOG) (GOOGLE) the glass has failed.

Like the Apple Watch, these products are likely to be initially connected to the iPhone. Although the smartphone will do much of the heavy lifting, streaming 3D content to the glasses will require a lot of power. Therefore, long battery life will be critical for AR devices.

But ultimately, it will all be about the content. To quote venture capital firm Loup Ventures, managing partner Gene Munster (former Piper Jaffray analyst), “To be successful in AR, there’s the piece of hardware, but you also have to do other things: from maps to social networks and Payments”. Munster believes that Apple is one of the few companies that can pull it off. In fact, Apple is devoting a lot of resources to AR technology and putting some of its best engineers on the project and hiring talent from Facebook’s Oculus and Microsoft’s HoloLens (MSFT).

The potential use cases for augmented reality in the area of ​​health and fitness are particularly promising. Fitness wearables expert Ted Vickey, a member of the EQM Wearables Index Committee, cites the recent Pokémon fitness craze as an example of what the future could hold for augmented reality within fitness. Another recent example is Zumba’s new virtual reality class experience, which offers a 360-degree group Zumba class from the comfort of your own home. “We’re only at the tip of the iceberg when it comes to using this kind of technology in the health and fitness space,” says Vickey.

AR a demand controller

According to IDC, although AR still lags behind its VR cousin in terms of current shipments, AR headsets are expected to generate significantly higher revenue over time as the projected value of AR grows from $209 million in 2016 to $48.7 billion in 2021. This far exceeds IDC’s VR headset forecasts of $2.1 billion in 2016 to $18.6 billion in 2021.

Gene Munster is particularly optimistic about a possible Apple push into AR based on his company’s survey of 502 potential iPhone X buyers rumored to be available this fall. When considering consumers likely to purchase the phone, 26% cited an interest in augmented reality features. Not surprisingly, this interest was highest among the male consumer and millennial demographic ages 18-29. Based on the survey data, he predicts that AR-related features in the new iPhone will be a major driver of demand, potentially impacting AR “in a very big way.” In fact, he sees the new upgrade cycle and the tech giant’s foray into AR as a reason to own stock.

Opportunity set on portable devices

Augmented reality and virtual reality are just two of many promising wearable technologies represented in the EQM Wearables Index and the ETF that tracks it, the WEAR ETF (WEAR).

When most consumers think of wearable devices, they think of activity trackers and smart watches. But the set of opportunities is much broader. Wearable devices seamlessly integrate computing and monitoring functionality, providing easy and reliable access to immediate information, acting as a “no-tether” gateway to the Internet of Things. Smart wearable devices provide innovative solutions for medical technology, industrial and military purposes, as well as consumer applications in infotainment, lifestyle, sports and fitness.

Wearables are any electronic device that can be worn on the body as an accessory or as part of clothing. In fact, Levi’s and Google are about to launch a new smart commuter jacket for those who cycle to work. It allows passengers to receive phone calls, get directions, and check the time with just a swipe of the sleeve. This example of smart clothing provides a preview of some of the wearable innovations in development outside of AR and VR.

Here is a table that summarizes some of the many applications of wearable technology:

click to enlarge

Source: EQM Indices, Investment Case for Wearables White Paper

Not surprisingly, according to Juniper Research, wearables are on track to become a $19 billion industry by 2018.

The Apple Watch was Apple’s first foray into wearable technology. While it hasn’t had the same magnitude of success as the iPhone or iPad, the Apple Watch still leads the smartwatch category with 152 million units sold.

And don’t rule out the smartwatch just yet, either. Research firm IDC just doubled its estimates for the segment, as it expects it to “hyper-segment” into niche categories such as connected kids’ watches, sports watches, luxury and fashion watches, and lifestyle watches that better address the needs of different segments, be it communication, health and fitness, or as luxury and fashion smartwatches.

A great example of IDC’s hyper-segmentation thesis is the popularity of the children’s watch segment in China, which sold 16 million units in 2016. These watches are primarily designed to help concerned parents keep track of their young children who don’t know what to expect. they had a smartphone.

After a brief slowdown in 2016 due to launch delays from major platforms and vendors struggling to keep up, IDC expects new vendors, emerging form factors, and expanded retail distribution to drive shipments around the world next year. year.

AR Genre Defining Moment

While it’s nice to see growth in the smartwatch category, it now looks like the next big thing in wearable tech will be augmented reality. If companies like Apple succeed with AR, it will be a transformative moment for the wearable industry as a whole. And tech giants like Facebook, Google and Microsoft are also heading down the AR path in hopes of creating a genre-defining product that permanently augments wearable reality.

Divulgation

EQM Indexes is the creator of the EQM Wearables Index, which has been licensed to Exchange Traded Concepts as an ETF. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investment instruments based on that index. EQM Indexes does not sponsor, endorse, sell, promote or administer any mutual fund or other investment vehicle offered by third parties and seeking to provide an investment return based on the performance of any index. EQM Indexes does not guarantee that investment products based on the Index will accurately track the performance of the Index or provide positive investment returns. EQM Indexes is not an investment advisor and does not make any representations regarding the advisability of investing in such investment fund or other investment vehicle. The decision to invest in any mutual fund or other investment vehicle should not be based on any of the statements set forth on this website. Potential investors are advised to make an investment in any such funds or other vehicles only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document prepared by the issuer of the investment or on your behalf. background or other vehicle. The inclusion of a security within an index is not a recommendation by EQM Indexes to buy, sell or hold said security, nor is it considered investment advice.

Backup documents

1. Investment_Case_for_Wearables_White_Paper.pdf

Editor’s Note: This article discusses one or more securities that are not listed on a major US stock exchange. Be aware of the risks associated with these stocks.