ARK Genomic Revolution Multi-Sector ETF: An Overbought But Promising Niche Play
- I am neutral on ARKG, an exciting, niche biotech ETF that currently looks overbought on the charts.
- I expect investor interest in this space to stay elevated on account of COVID-related anxiety as well as a greater long-term federal funding thrust into emerging medicinal technologies.
- This is a volatile and expensive ETF where excess returns tend to come at the cost of excess risk; the ETF does not offer any dividend yield either.
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The ARK Genomic Revolution Multi-Sector ETF (BATS:ARKG) offers investors exposure to a very interesting sub-segment within the biotech space - genomics. This niche ETF was created in October 2014 and offers investors access to genomic-based companies dealing with Targeted Therapeutics, Bioinformatics, Molecular Diagnostics, Stem Cells, Agriculture Biology, and CRISPR (a family of DNA sequences). ARK has been one of the best performing risk assets YTD, outperforming both the S&P 500 and the SPDR S&P Biotech ETF (XBI).
Source: Yahoo Finance
The genomic medicine field is an emerging field within the broader biotech sector that studies the genetic makeup of people and its associated effect on health. This is a $19 billion market that is expected to grow at 14% CAGR to reach $36 billion by 2024 based on a MarketsandMarkets report. These figures were being bandied around, long before the coronavirus reached our shores, with government funding being one of the key drivers of this expanding market. In light of the coronavirus, I expect federal funding and research intensity to explode, as I feel it's about time we transitioned away from this dated reactionary model of countering diseases and pandemics to a more proactive stance that gives us every chance of staying ahead of the curve. Going forward, I do feel that political rhetoric and support will be oriented towards emerging medical therapies such as genomics, which should see this sector grow at a CAGR figure in the late teens rather than the 14% mentioned above.
COVID-19-related anxiety should continue to buttress positive sentiment for biotechs and genomics
Subscribers of the Lead-Lag Report will recollect that over the last few weeks, I've been trumpeting the performances and the bearings of biotech stocks, that have significantly outperformed the broader market.
With the widespread clamor to shun lockdown restrictions and re-open the economy, both from the Davids and the Goliaths of this world, this does feel like a race against time. Given what's at stake, investors' interest has understandably perked up in this sector. For some context, let's consider Gilead Sciences (GILD), the first biopharma firm to secure US FDA emergency approval for its drug - remdesivir. According to the Institute for Clinical and Economic Review (ICER) - a prominent price watch-dog - you're looking at a potential retail price of $4,460 per patient; Jefferies says that, even if this were purported to be a fanciful figure and subsidized at more than a 75% discount, you're still looking at c.$1billion in sales from this drug alone, as the company's target market is 1 million patients for 2020. Mind, this is less than a third of the total global coronavirus cases, at 3.58 million. My back-of-the-envelope calculations tell me that $1billion in sales, at a bear-case price point of $1,000 per patient, represents a potential swing factor of c.5% to Gilead's annual topline. With the WHO showing some interest in the drug for wider global use, you're looking at quite the monumental opportunity for Gilead Sciences, which I imagine hasn't been the only biotech/biopharma entity pulling out all the stops to get something over the line.
Separately, drilling down to our specific area of interest - genomics, there have been reports on how rapid, large-scale sequencing of genomes (in a matter of hours or days) has helped contain community spread of COVID-19. When the number of virus infected cases grow, the effectiveness of contact-tracing becomes close to impossible, whereas by studying genetics, a lot of insight can be gained. Genomic players will also play a key role in helping public health and federal officials gauge the right time to relax social-distancing measures. Using genomics, authorities will be able to determine which activities are likely to spread the virus and which activities will be low-risk. All in all, I see genomics playing a fundamental and game-changing role in our altered world.
Source: Knowable Magazine
Since 2017, ARKG has been on a strong bullish run from the $16 levels, forming a bullish channel in the process. Most recently, in April, we saw a very strong breakout candle, after spending the whole of 2019 consolidating within the $27-34 range (green highlighted area). While the current breakout candle will certainly whet the appetite of momentum traders, I would be particularly wary of the prospect of a false breakout, especially as this is a pattern that has been seen quite recently on the ARKG charts. From August 2017 to July 2019 (yellow highlighted area), ARKG formed a base at around the $23-30 levels. In August 2019, it then saw a strong bullish breakout candle above $30 which then ran into resistance at the channel boundary and was quickly sold into. History suggests that getting into ARKG soon after a strong monthly bullish candle rarely pays off.
Thus, I would advise potential investors to consider ARKG if and when it pulls back to the $30-34 zone. A good sign of strength would be for it to pull back and consolidate at those $30-34 levels before it looks to create new highs beyond the current highs. That is the leg I would be more inclined to ride, for any potential long trade, rather than the current upswing leg.
Source: Trading View
Historical risk-adjusted return metrics of ARKG warrant some caution
Source: Yahoo Finance
We saw on the price chart in the technical analysis section that most of the upside from this ETF has come over the last three years, from 2017 onwards. Gauging the quality of these 3-year returns, what is evident is that, while return metrics and alpha have been very strong relative to peers, this is a very volatile ETF and not one for the faint-hearted. Volatility - as measured by standard deviation - at 32, is almost twice that the category average. This volatility has had a strong impact on both the Sharpe ratio (no excess returns) and Treynor ratio (substandard excess returns per unit of risk vs the category average).
ARKG is probably not an ETF for everyone. There is no dividend yield, spreads are quite wide, fees are steep by general equity ETD standards at 0.75% (although cheaper than other biotech peers - ProShares UltraShort Nasdaq Biotechnology (BIS) and ProShares Ultra Nasdaq Biotechnology (BIB) which both charge 0.955) and as I've also highlighted above, returns tend to be generated at the cost of excess risk. Yet still, this is an exciting, high-growth space to be involved in and one that will only gain prominence in the years ahead as DNA sequencing costs become more affordable and health research spending increases.
As I highlighted to subscribers of the Lead-Lag report, I do expect volatility to remain rampant in the foreseeable future, creating new extremes. It's highly unlikely that we see a one-dimensional linear move on either side, which also means there should be opportunities for overbought assets like ARKG to correct to more meaningful levels where the associated risk-reward is more palatable. Thus, until a pullback is seen and some base forming can be seen at $30-34 levels, I would be neutral on ARKG.
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