👩💻 Ark Innovation ETF - $ARKK
Ark Invest's groundbreaking Innovation ETF - $ARKK finally became available for European investors last December.
But with tech stocks tanking due to macro and geopolitical forces, is now a good time to invest? Here's my verdict:
Why invest in the Ark Innovation ETF?
An exchange traded fund or ETF is a way of investing in a basket of stocks which track an index, theme or particular sector of the economy. In many cases traditional ETFs passively track benchmark indexes like the S&P 500 or Nasdaq 100. This is done by automatically rebalancing the positions of the fund according to the market cap of each individual company. This approach is designed to remove the human element from the decision-making process.
Ark’s flagship Innovation ETF is different as the fund is actively managed and focuses on disruptive technologies. The head of Ark, Cathie Wood and her team believe that by specialising on innovation they can capitalise on a number of market inefficiencies and gain an edge over traditional Wall Street analysts. Ark outlines four main areas of market inefficiency:
The public markets focus on the short-term - companies traded on the stock market must report their earnings every financial quarter. This means that Wall Street is set-up to analyse stocks based on short-term quarterly time horizons. Ark says that it takes 3-5 years for a new disruptive technology to play out and demonstrate its true growth potential and profitability.
Wall Street’s analyst structure was not built to assess new technologies. Ark argues that Wall Street is divided into traditional sectors or “silos” which prevent analysts from understanding emerging technologies which span across multiple disciplines. For example a traditional automotive analyst looking at Tesla stock would not be exposed to such diverse fields as the declining cost of electric batteries and the latest developments in artificial intelligence.
Passive indexes are backward looking - Ark believes that passively tracking a broad index means investing in companies which have already exhausted most of their growth potential. Lesser known technologies and companies, especially those which are not profitable yet, have not been priced correctly by the market.
Proprietary research - much of the research produced on Wall Street is private or proprietary as many banks and hedge funds are afraid that their information could help the competition. Ark takes a completely different approach. They argue that by openly sharing their research on social media with the public and various scientific communities they can reach better and more informed investment decisions.
💡Ark Invest’s “Big Ideas” for 2022
You can read more about these big ideas by downloading Ark’s Big Ideas 2022 PDF but essentially they can be grouped into these 9 key areas:
Artificial Intelligence
Electric Vehicles and Autonomous Ride Hailing
3D Printing and Robotics - Ark’s main focus is on 3D printing in industrial and factory settings (not for consumer applications).
Gene Editing - the use of CRISPR gene editing technology in the development of new treatments for human diseases.
Multi-omics - a relatively new field which expands on genomics (mapping human genes) by combining the study of a number of other biological “ome” datasets to gain new medical insights and develop more effective treatments.
Digital Wallets - a wide sector including a variety of consumer fintech-related companies such as Paypal, Square (renamed to Block), Robinhood, Coinbase and apps like Apple Wallet.
Digital Consumers - includes video games, digital advertising and social e-commerce - the trend towards selling products exclusively via social media platforms.
Autonomous Logistics - companies pioneering the use of self-driving vehicles drones and other robotics for food and e-commerce delivery.
Orbital Aerospace - in the near term this will include satellite internet services such as Starlink and in the longer-term this could include companies providing faster global travel through hypersonic flight.
📊 Top 10 Holdings in $ARKK
📈 All Time Price Chart
🚀 Bull Case
Delegation of Expertise
As shown above in the Big Ideas section, Ark covers a multitude of new emerging technologies which often overlap and reinforce each other. It would be nearly impossible for a single individual to gain expertise in all the areas covered by Ark and indeed the firm has specialists who have many years of practical experience in each field.
To replicate what Ark does you would need to select the correct stocks, keep up-to-date with the latest developments in each company, and decide when is the correct time to buy and sell. This is even more challenging for analysing companies in the so-called “deep tech” field such as gene editing and multi-nomics which requires a strong medical and scientific background. By simply buying the Innovation ETF you only have one asset to manage which can represent your primary allocation to the high growth tech sector.
Track Record
As outlined by software engineer Kennan Mell in his Seeking Alpha article, Ark has already demonstrated an impressive track record in accurately predicting the development of nascent technologies. Looking at a number of metrics from the falling costs for human genome sequencing to mobile payment penetration and other conventional stock market data, Mell concluded that Ark’s predictions on the whole since 2017 were surprisingly accurate.
Mell graded the firm with an “A” for its 2017 predictions on Deep Learning (a sub-field of artificial intelligence), CRISPR, mobile payments and cryptoassets. The only really big “miss” that Ark had was on 3D printing as they predicted this market would be worth $41 billion by 2020 when it is currently only worth $12.6 billion.
In terms of overall financial performance, Ark has returned 249% to investors since the fund was created in 2014. This represents an “outperformance” over the main S&P 500 “SPDR” ETF which only returned 151% to investors over the same time period. On the other hand, if you had just invested in a passive Nasdaq 100 ETF (with lower fees) you would have made 264%. But we should remember that Ark’s returns to date have been compressed recently, partly due to current macroeconomic conditions which will be covered in the bear case section.
Incidentally, at the time of writing (before the market opens on Tuesday 8th March) the price of $ARKK is below $60 which was the pre-pandemic level of the ETF. This might be the right timing for long-term investors looking for a low entry price (not to be taken as financial advice).
🐻 Bear Case
Vulnerability during times of macroeconomic stress
In the current macro environment with the Federal Reserve on the verge of raising interest rates and commodity prices surging due to the war in Ukraine, high growth assets like Ark’s Innovation ETF will be the first to be sold. This is especially true of institutions who may have specific mandates to sell riskier assets during periods of uncertainty or high volatility. Over the past year the ETF’s price has gone down over 47%.
Because the Innovation ETF is liquid and can be easily bought and sold like any other stock it is vulnerable to changing market sentiment and conditions. This might explain why Ark head Cathie Wood is reportedly interested in launching a special private venture fund. As the fund would not trade on an exchange like an ETF it would not be liquid and easy for investors to sell quickly during bearish market conditions. It is not clear from early reports whether ordinary retail investors would have access to such a fund.
High Fees
At 0.75% per year, Ark charges very high fees in comparison to passive ETFs which are in the range of 0.03-0.07%. This expense goes up even more for European investors who got access to the Innovation ETF for the first time in December 2021. In Europe the ETF is offered via a company called Leverage Shares who charge an additional 0.35% annual management fee on top of Ark’s original 0.75%. However, some might still consider these fees to be worthwhile given the active management and technological expertise that Ark provides.
Extensive Short “Interest”
One of the more worrying market dynamics for Ark is that other firms have developed financial vehicles to short the ETF (ie. bet on the price to go down). In the US, traders have access to the Tuttle Capital Short Innovation ($SARKK) ETF and in Europe Leverage Shares also offers short products for three different Ark ETFs with 3x leverage.
These short-based ETFs are designed for professional traders operating under short-term time horizons and can magnify any downside movement in the ETF. Again this may just be part of the hazards of operating in the public markets as short ETFs also exist to bet against the benchmark S&P 500 index for example.
⚖️ Verdict
In my view (not to be taken as financial advice), the bullish factors for Ark’s Innovation ETF outweigh the bearish side of the argument. This is based on my conviction that exponential technologies are still not well understood on Wall Street, Ark’s track record in correctly predicting major tech trends to date, and the fund’s long-term outlook which I believe will outperform the main indexes.
This ETF is a very convenient way for investors to gain exposure to a diverse selection of high growth tech stocks and leverage Ark’s unique expertise.
What did I miss? - These reports are a learning process for me and I’m very open to constructive feedback and suggestions.
What stock or crypto asset should I cover next? You can contact me by email: hellorobostox@gmail.com or feel free to leave your response in the comments. You can also follow me on Twitter: @daneasterman.
Disclaimer: I am not a financial advisor, none of this report should be taken as financial advice. Instead this should be viewed as starting point to conduct your own research. I do not hold any positions in Ark’s Innovation ETF or any of the Ark ETF products provided by Leverage Shares at the time of writing.