KOMP ETF: Diversifying Through Innovation And Disruption
Summary
- The ETF is extremely well diversified through 400 of the most disruptive companies in 10 countries, primarily the U.S.
- Although KOMP widely outperformed the broader tech market, it slightly underperformed the prominent ARK Innovation ETF.
- After an unprecedented surge throughout 2020, the included companies of KOMP are trading in thin air in terms of valuations.
- Investors should therefore expect high volatility in coming years, and perhaps lower returns.
Overview
SPDR S&P Kensho New Economies Composite ETF (NYSEARCA:KOMP) offers investors a chance to invest in innovation and disruption through a diversified fund. The ETF tracks a tier-weighted index of U.S-listed companies that disrupt traditional industries. The ETF derives its name by including companies from developed and emerging markets that transform the economy through innovation and disruption. Here, the main themes include autonomous vehicles, 3D printing, genetic engineering, nanotechnologies, and other megatrends of the future. The ETF includes 408 holdings in total, being weight-counted and rebalanced semi-annually. The ETF has an expense ratio of just 0.2%, representing the initial costs when investing in the fund.
Source: ETF.com
Now, after a blockbuster year for technology and innovation-related stocks, accelerated through the global pandemic and an easy money policy by the Federal Reserve, the ETF mightily rewarded investors by widely outperforming the broader technology index. There is no debate that future economies will thrive on technology and new industries created within, yet high investor enthusiasm has inflated individual valuations. Thus, investing in the ETF at current levels requires more caution, even after dropping 10% from all-time highs. On the other hand, the ETF might still be a good investment opportunity, considering how broadly it is diversified, reducing risk while capturing the most innovative industries' gigantic growth.
Components
Source: ETF.com
Vuzix Corporation (NASDAQ:VUZI): Being the largest holding of the ETF, the American company engages in the design, manufacturing, and sales of augmented reality (AR) display devices. These devices include cameras, sensors, and a computer that enables users to view, record, and interact with digital video content. In 2020, revenue surged 73% to $11 million, sending shares 1650% higher within a year.
Riot Blockchain (NASDAQ:RIOT): The company focuses on the blockchain ecosystem through its cryptocurrency mining operations, internal business, joint ventures, and investments in cryptocurrencies. Here, the company has roughly 8000 integrated circuit miners at its main crypto mining facility in Oklahoma. Riot Blockchain also has a 13% stake in the digital currency exchange company Coinsquare. Benefitting from the steep surge in Bitcoin price, shares are up by a staggering 4630% year-over-year.
3D Systems (NYSE:DDD): Operating as an additive manufacturing solutions firm, 3D Systems provides three-dimensional (3D) printing and manufacturing solutions. Such products include 3D printers for plastics and metals, software, and demand solutions. It supports two industry verticals: Healthcare (dental and medical devices) and Industrial (aerospace and transportation). Although revenue shrank 12% in 2020, the stock is up 284% YoY.
General Motors (NYSE:GM): The legacy U.S auto manufacturer designs, builds and sells trucks, crossovers, cars, and automobile parts worldwide. In terms of innovation, its subsidiaries and business units provide connectivity services while developing self-driving technology. GM also aims to transform its business towards electric cars, announcing plans to go fully electric by 2035. As the business recovered from the pandemic, shares are up by 195% YoY.
Blink Charging (NASDAQ:BLNK): The U.S company owns, operates, and provides electric vehicle charging equipment and EV charging services. Here, the company offers residential and commercial EV charging equipment, enabling EV drivers to charge at different locations. The data is provided through a cloud-based platform that maintains track of all charging stations, enabling remote monitoring and management and payments of EV charging stations. In just one year, the stock price surged by over 2400%.
Performance
In a time frame of just one year, the ETF has rewarded early investors with a staggering return of 155%. This means KOMP has more than doubled the NASDAQ's 77% return and nearly tripled the S&P 500's return of 60%. As briefly mentioned earlier, this is mostly due to the sharp surges in individual stock prices. For instance, Riot Blockchain jumped over 4000%, while Vuzix shares surged 1650%, and Blink Charging saw its stock price increase by over 2400%. While other holdings such as GM did not perform as well, these individual stocks contributed significantly to the entire ETF's performance. On the other hand, as the top 10 holdings only account for 17% weight of the ETF, the prominent ARK Innovation ETF (ARKK) outperformed KOMP.
The ETF by Cathie Woods' Ark Funds comprises various cutting-edge firms that thrive on "disruptive innovation," similar to KOMP. However, it only includes 55 holdings, with the top 10 holdings accounting for 48% weight. These holdings include Tesla (TSLA), Square (SQ), Teladoc Health (TDOC), Shopify (SHOP), etc., all of which surged throughout last year. Thus, due to the great extent of diversification in KOMP, the ETF underperformed ARKK by roughly 50%. However, it should be noted that in the recent sell-off, ARKK dropped about 23% from all-time highs, while KOMP is only down by 10%. Therefore, we should expect KOMP to outperform AKK in a bear market due to lower volatility.
Valuations
Disruption, growth, and innovation don't come cheap: Half of the ETF's top 10 holdings appear significantly overvalued at current levels, while only one company looks undervalued to me. In this regard, MicroVision (MVIS) trades at over 600 times sales, while Nano Dimension (NNDM) trades at over 400x EV to Sales. Yes, these companies will likely grow their sales quickly in coming years, but such valuation implies nearly a decade of doubling sales every year to get anywhere near fair valuation. In fact, MicroVision only generated a mere $395k last quarter, yet is a billion-dollar company.
Other costly companies on the list include Blink Charging (BLNK) and Vuzix, trading at 170 and 71 times forward sales, respectively. That said, Riot Blockchain, Ambarella (AMBA), and Tesla are also overvalued at over 10 times forward sales but trade at a more acceptable valuation regarding growth rates, I believe. On the other hand, 3D Systems and General Motors can be considered undervalued. GM, for instance, trades at a P/E ratio of just 13 and pays an annual dividend of 2.64%. However, overall the ETF still appears overvalued, as the average P/E ratio stands at -70.
Risks
The various overvaluations in KOMP ETF are simultaneously its biggest risk factors. Even though the ETF reduces individual risk by diversifying with over 400 fairly weighted holdings, the most overvalued companies still account for over 10%. I believe it is only a matter of time before these valuations will come back down to earth, as 600 times forward sales simply isn't sustainable in the long run. While it affected the performance positively this year, it will be the reverse case in a bear market. Therefore, investors should brace for higher volatility in the future. Moreover, as mentioned in the last section, most of these companies are nowhere near profitability and often have constraints regarding liquidity. Larger and more established firms can put substantial pressure on these firms by competing with more capital, leading to bankruptcy in the worst-case scenario. Again, none of these scenarios are reflected in the given valuations.
Takeaways
It is no surprise that investors are willing to pay any price for companies that disrupt and innovate existing industries (or creating new ones). After all, we're in the middle of the digital revolution, which has only been accelerated through 2020 and is likely to continue for many decades. In fact, it has been predicted that roughly 75% of the companies listed on the S&P 500 could disappear by 2027, with the average life span of a public company shrinking to just 18 years as new companies take over.
On the other hand, valuations of over 600 times forward sales rather point towards speculation than fundamentals, pushing various companies into bubble territory, IMO. The companies included in the ETF are certainly extremely innovative and could have more upside, but it won't be easy to replicate returns seen in 2020 going forward.
So you may ask why my call is bullish on KOMP ETF. I personally believe that although most of the stocks are extremely overvalued, in the long-term perspective, there is more upside considering the drastic shift towards "new economies." Moreover, the ETF will likely rebalance its position soon to relocate capital towards less overvalued stocks. However, it does not make a cut into my portfolio right now for the reasons mentioned earlier.
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