Have you heard of ARK Invest?
They actively manage 5 ETFs, of which the ‘lousiest’ performer is up 77% year-to-date. Here are the impressive returns delivered by each ETF:
| ETF Name | Ticker | YTD returns (23 Nov 2020) | Fund Size |
| ARK Genomic Revolution ETF | ARKG | +124% | $3.53B |
| ARK Next Generation Internet ETF | ARKW | +116% | $3.62B |
| ARK Innovation ETF | ARKK | +106% | $11.68B |
| ARK Fintech Innovation ETF | ARKF | +85% | $1.13B |
| ARK Autonomous Technology & Robotics ETF | ARKQ | +77% | $977.87M |
Most ETFs are passive and that means the fund manager doesn’t make investment decisions but merely follow the indices which the ETFs are tracking. ARK Invest’s ETFs are actively managed (they have two passively managed ETFs though) and the investment team has to constantly find the best ideas to include in their portfolios and sell those poorer ones. There are no index to track these actively managed ETFs.
ARK’s focus is on publicly listed disruptive technology stocks in various fields such as biotech, robotics, internet platforms, SaaS, 3D printing, and more. Catherine Wood is the founder of ARK and she has become a legend because of the ETFs’ performances (and her controversial views).
While most fund managers would play down the value of using social media to engage investors, Wood went the other way and constantly share her views on various platforms such as Twitter (here and here) and YouTube. This is important as ETFs typically cannot rely on financial firms or advisors for distribution as these entities are not incentivized to do so. By sharing her views, investors can understand the ETFs better and make an informed decision of whether to invest in them. Even if you choose not to invest in any of ARK’s ETFs, you can learn an awful lot. That’s generosity.
These ETFs have an expense ratio of 0.75%. This is not expensive considering that they are actively managed. Hedge funds can charge 20% AUM fee and an additional 20% performance fee. ARK Invest ETFs do not charge a performance fee and yet has outperformed most of the hedge funds out there. For investors, it is a steal to get access to hedge fund grade management at low ETF fees.
Hence, you can consider ARK ETFs if you want to invest in disruptive technologies over the next 5-10 years and want a good investment team to decide on behalf of you. Mind you, they are not immediate ideas that may pay off in 1-2 years. Even though the performances have been solid in 2020, we cannot assume that this will be the case forever. So you need some holding power and the right expectation.
Alternatively, I prefer to look at their stocks to get some trade ideas because I may not like all the stocks they picked. This is another benefit to investors – we get to see all the holdings in these ETFs because they are required to disclose them, by law. You can even get a daily update on their positions! This is unlike hedge funds which would keep their holdings a secret, announcing only the big transactions more than a month after the fact.
I noticed there were some overlaps among the ETF holdings (i.e. different ETFs invested in the same stocks) and I wanted to know the overall ARK exposure to each stock. After tabulating the positions, I noticed a Pareto distribution in their portfolio weightage:
20 stocks out of 144 in the portfolios are worth 58% of the total value.
The top 5 make up 27% of the total value.
This means that these 5 stocks are high conviction bets by ARK.
Let’s take a quick look at them:
Tesla ($1.6b position, 8% of portfolio)
Tesla is the biggest position in ARK’s portfolios – an overall 8% exposure. This stock needs no introduction and I recently did a video to compare the hot electric vehicle (EV) stocks:
Wood was one of the early advocates of Tesla and she made a sensational forecast that Tesla could hit $7,000 to $15,000 in 2024.
Whether you believe it or not, she has put money where her mouth is and Tesla is now a whopping $1.6b position in her ARK ETFs – the largest position in a single stock.
Invitae ($1.1b position, 5% of portfolio)
In a nutshell, Invitae provides genetic testing. It is building a large database of genetic information of as many human beings as possible. Data is the new currency and this is very valuable asset that can be used to treat diseases of the past and the future.
Genetic and biotech therapies can only be applied when your DNA is known. Hence, genetic testing is going to be necessary and I won’t be surprised it may be mandated in the possible future.
Invitae has made genetic testing cheaper – the cost has fallen from over $1,000 in 2015 to today’s $250. This would allow more individuals to afford the tests and have a better chance of seeking genetic therapies if needed.
Roku ($1.1b position, 5% of portfolio)
To be honest, this is the most surprising investment in this list to me. What’s so special about Roku? Isn’t it just a streaming device that has little competitive advantage against other brands?
The only thing that I can explain is that it is a meta-streaming platform whereby you can stream almost any service with it – examples are Netflix, Disney+, Apple TV and Amazon Prime. With the streaming war going on and making it hard for you to decide which to subscribe to, you can just sign with all of them and stream them with Roku. I see it as a disruptor to those with cable tv set top boxes at home – Roku is about to replace all of them.
Square ($988m position, 5% of portfolio)
Square started off as a point-of-sale (POS) for small businesses that cannot afford a credit card machine from the banks. You just need a smartphone and a Square device that goes into it via the audio jack and viola! You can collect credit card payments without hassle.
Square has definitely matured from that point and now offers full suite of POS systems for retailers online and offline. It has also launch a cash app (digital wallet) to facilitate mobile payments for individuals. It has also gone as far as buying $50 million worth of Bitcoin. I won’t be surprised if they become a full-fledged digital bank in the future, taking a leaf out of Ant Financial’s playbook.
CRISPR Therapeutics ($977m position, 5% of portfolio)
First of all, I am not trained in biotechnology so take my explanation with a pinch of salt. CRISPR is a DNA sequence found in bacteria that could edit human DNA. Hence, scientists leverage on this concept to intentionally edit human DNA if needed – for example, treating a cancer patient by editing the mutation away.
CRISPR Therapeutics is one of the leaders in this area and Intellia and Editas are competitors. These three companies are currently engaged in a patent war. ARK has invested in all 3 but the largest position is in CRISPR Therapeutics probably because there were already successful trials on real humans. Wood believes they will end up licensing one another’s patent for the benefit of the business instead of competing their margins away. Only time will tell.
Would you invest in disruptive technology?
ARK ETFs have definitely performed very well in 2020, riding the tech wave that came along after Covid-19. It is prudent to extrapolate historical performance into the future. That said, disruptive technologies are important to define a new future for all of us.
So, are you a believer of disruptive technologies and most importantly, would you put your money on them and if yes, how much?
This article led me to ARKW and then to Palantir with its high option premiums. I suppose disruptive technologies also disrupt pricing.