ARK Space Exploration ETF: Why Cathie Wood's Latest Creation Should Be On Your Radar
Summary
- ARK Space Exploration ETF is the most recent launch from the popular fund manager ARK Invest, focused on the new age of space powered technological advancement.
- ARK and their high profile CEO Cathie Wood have enjoyed incredible success over recent past and this has made the ETF a hot topic in the investment industry.
- The global space industry is forecast to grow into a $1 trillion per annum revenue generator by 2040.
Investment Thesis
ARK Invest is one of the most highly regarded investment managers in recent history and their latest ETF is sure to get tongues wagging. We believe that the ARK Space Exploration ETF (BATS:ARKX) is poised to benefit from strong equity inflows and investors’ appetite for exposure to space innovation. We believe these factors, aligned with the companies selected by Cathie Wood, should provide strong long-term performance for investors.
Background to the thesis
Most knowledgeable investors will need no introduction to Cathie Wood and ARK Invest; the equity house has been a constant feature in financial press and social media throughout most of 2020 as their ARK Innovation ETF (ARKK), ARK Genomic Revolution Multi-Sector ETF (ARKG) and ARK Next Generation Internet ETF (ARKW) took the markets by storm, comfortably exceeding the broad market indices in the Federal Reserve induced economic rebound.
It’s therefore no surprise that their newly launched ETF has attracted a lot of interest, heightened further by its space and innovation focus at a time when global investors are looking forward to how the post-pandemic world will develop. The expectation held by many is that technology will change the way we interact, travel and transact, with some speculating that the not too distant future will include space tourism via Virgin Galactic (SPCE) and others, satellite-powered internet technology and superfast suborbital flights. This Morgan Stanley report outlines the scale of the opportunity in this space, with their expectation that “the global space industry could generate revenue of more than $1 trillion or more in 2040”.
ARK’s new ETF is well positioned to benefit from these trends through its exposure, as described in its prospectus, to companies that are “leading, enabling, or benefitting from technologically enabled products and/or services that occur beyond the surface of the Earth.” This is a key definition for investors to be aware of, as it is not only the companies that are venturing into space that it is investing in, the inclusion of beneficiaries of the new space age will also widen the scope of its potential to any company that may benefit from some of the key trends we outlined earlier.
Catalysts For growth
We’ve already outlined the scale of the future space industry, with expectation for this to grow into a $1 trillion per annum revenue generator by 2040. In addition to this clear driver of growth for investors, we believe there are two further key catalysts for success of the ARKX. The first of those is probably the most obvious, the value of the stewardship by portfolio manager Cathie Wood cannot be underestimated given her recent success. A pre-pandemic article from Yahoo Finance outlines her dominance of the fund management industry up to early 2020, with performance that outranked BlackRock and Janus Henderson products.
(Source: Bloomberg via Yahoo Finance)
The good news didn’t stop there for ARK investors, as Cathie’s team posted incredible returns in 2020, becoming the largest actively managed ETF growing from $3.1 billion to $34.5 billion by the end of 2020.
Our thesis suggests that this prior performance, and investors clamoring to be involved, may propel their new ETF in the same manner as it has propelled their more longstanding funds. For continued growth and strong performance returns, ETFs require two factors, the first being that of continuing investment and growth in net asset value. In our opinion, that will be comfortably covered by the reputation and sector focus we have outlined. The second factor is the strong performance of the carefully selected underlying companies and, as such, our second key growth catalyst takes a deeper dive into what these holdings are.
We noted earlier the definition of the fund's scope, in that not only companies which engage in space travel, innovation and development are targets for ARKX, but also those who are set to benefit from space innovation and development. This widens the scope considerably, but also presents the opportunity for investors to benefit from some of the most innovative and technologically linked firms in the world. ARKX's top holdings can be noted from their Fund Holdings PDF, available on their website and shown in an extract below.
(Source: ARK Invest ARKX Portfolio Holdings)
A quick scan of their top five holdings, which make up 30% of portfolio weighting, gives investors a flavor of what to expect from this ETF. They are heavily invested into their top holding Trimble (TRMB) at 8%. This global software and hardware solutions company serves many of the world's top industries but would not be considered a pure space play by many, nor would the remainder of the current top five holdings with their E-commerce, Defense, Technology and 3-D printing sector focus. For many investors, this may seem strange given the headline name of the ETF; however, per our thesis, this broad focus of companies that may directly or indirectly benefit from space innovation gives investors an appetizing mix of exposure, plus diversification across multiple growing industries. Many of these firms are part of secular growth trends expected to continue to expand in the coming years. And when considered alongside ARK’s ability to pick winning companies, we think the ARKX ETF offers an asymmetric upside potential. However, as with any investment, there can be risks to the thesis.
Risks to the bull thesis
Some investors may read some of our bull thesis and disagree; value investors in particular may find the allocation to “expensive” technologically focused companies to be unfavorable. This theory can no doubt be expanded further by a quick scan of the P/E ratios of those top five companies we mentioned earlier. Trimble, JD.com (JD), L3Harris (LHX), Kratos (KTOS) and ARK's own 3D Printing ETF (PRNT) all have forward looking PE ratios that would exceed the general market's PE ratio, as can be seen below.
However, we are not particularly worried from this perspective and are firm believers in the thesis outlined by William O'Neill that "One of the great paradoxes of the stock market is that what seems too high usually goes higher, and what seems too low usually goes lower." Often times stocks that seem expensive are that way because they are popular, high growth companies with a long runway ahead. We personally prefer to follow these trends as opposed to finding value in turnaround plays that may take longer to materialize.
Another risk factor to understand before committing to any ETF is to understand their pricing structure. ARKX has a simple 0.75% annual expense fee; this may seem high to some investors, especially when considered against a low fee index tracking fund such as the Vanguard Total Stock Market ETF (VTI) at just 0.09%. However, this 0.66% additional drag on your capital should be considered against returns from the underlying. There is no question as to which ETF you would rather have owned during the recent year, as even with higher fees, ARK's Innovation ETF surpassed most index trackers easily.
That being said, due to the sharp rebound to all-time highs seen by the market in 2020, there may now be some time for consolidation, and returns in 2021 may well normalize somewhat. It's at this point that the higher fees may become more of a real issue, as the gap between high growth stocks and the general market reduces and this is a risk that investors should consider carefully. For investors with a longer term horizon, this may pose less of a risk to your decision.
The third risk to discuss, again it is a factor that should always be considered when investing in ETFs - Liquidity. Cathie Wood's other funds have been called out in various financial media articles as having a liquidity risk such as this piece from FN London. The theory being that due to their own success and scale, ARK's funds are at such a size that their holdings can literally move the market in some of the smaller stocks that they own. This can cause concern when they need to liquidate cash if a large investor wants to redeem their shares, particularly in the case of ARKK's $22.8 billion of assets. In the case of ARKX's however, the current net asset value of just $63 million should not be a cause for concern, but we would recommend keeping this risk in mind should the net assets swell to some of ARK's sister funds.
Conclusions
In summary, ARKX currently offers investors the opportunity to get in on the ground level in a brand new ETF created by one of the most respected fund managers in recent history. The space innovation sector is forecast for considerable growth and the fund should be well poised to benefit. Whilst some investors may have concerns over risks, fees, or a slowdown in growth, our thesis is that there is still plenty more room for ARK's success to continue and investors with a long-term horizon should see a return that outpaces the fee differential against cheaper alternatives.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (11)
They hoodwinked a bunch of millenial dumb money to buy in at the top.
The average investor in ARKK has lost money .
