The ARK Innovation ETF (NYSEArca: ARKK) has received plenty of accolade, and boasts several newfound factoids. For example, ARKK is often hailed for its large weight to Tesla and this year, the exchange traded fund added to its legendary status by becoming the largest equity-based active ETF by assets.
“Companies within ARKK include those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the areas of DNA technologies (‘’Genomic Revolution’), industrial innovation in energy, automation, and manufacturing (‘Industrial Innovation’), the increased use of shared technology, infrastructure and services (‘’Next Generation Internet’), and technologies that make financial services more efficient (‘Fintech Innovation’),” according to ARK Invest.
There’s more to the ARKK story. In fact, it stands out as one of the premier avenues for investors to access companies capitalizing on disruptive technologies.
“While significant mispricing is less likely in the public markets than the private, innovative companies are difficult to value because they often have little or no profits and there is considerable uncertainty about their growth trajectories,” writes Morningstar analyst Alex Bryan. “So, the market tends to discount their potential to compensate for the risk.”
ARKK’s Ascent
Disruptive technology is not relegated to certain sectors as it will permeate into all industries in some form or fashion. For example, augmented reality is technology comprised of digital images superimposed over the real world, and its use is primed to drive industry growth–industries like real estate and manufacturing are already putting the technology to use in a variety of ways.
ARKK’s relevance to investors is enhanced by the fact that the ETF’s managers are not constrained by an index, nor are they limited by a singular industry or sector focus.
“ARK’s investment team estimates cost and demand elasticity curves for each technology, leveraging Wright’s Law,” writes Bryan. “This law states that for every cumulative doubling of units produced, costs will fall by a constant percentage. Declining costs are often key to the team’s investment thesis. As such, the managers aren’t looking for firms to hold on to high margins. Rather, they want their holdings to ride the cost curve down and lead the segment, which should allow them to grow profitably.”
ARKK is higher by more than 133% over the past year, beating the S&P 500 by roughly nine-to-one over that period.
For more on disruptive technologies, visit our Disruptive Technology Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.