Disruptive technological change is abounding and reaching various corners of everyday life as well as financial markets, but many advisors remain under-allocated to these critical disruptive trends. The ARK Innovation ETF (NYSEArca: ARKK) is a prime example of an ETF that can help asset allocators access multiple disruptive themes while avoiding, lumbering slow-growth sectors and industries.
Among the ETF’s top 10 holdings are fintech and streaming entertainment names as well as several companies involved in disruptive healthcare themes.
“Stocks in industries particularly at risk – big pharma, banks, and other financial services, fossil fuel-based energy, auto, and auto-related manufacturers, telecommunications, transportation, retail – dominate broad-based indices today,” according to a recent whitepaper by ARK Invest.
ARKK is actively managed, allowing the managers to capitalize on their best ideas while avoiding the pitfalls that come along with cap-weighted index funds.
“In fact, their market capitalization weighted index structure may be exacerbating the risk, reflecting success stories from the past, not the future,” notes ARK.
Technological disruption isn’t just disruptive. It can be destructive and creative. Destruction in the form of old technologies going by the wayside while new capabilities emerge, giving investors opportunities to profit along the way.
An example of the creation/destruction scenario is automation. What makes ARKK increasingly relevant in today’s investing landscape is that it features a harmonious approach to accessing automation and innovation whereas some rival funds emphasize one, but not both of those concepts. Additionally, automation often gets a bum rap because it’s seen as a jobs killer, but the opposite could prove true over time.
“Rapid change can create winners and losers, perhaps slower than expected at first, and then blazingly fast. As new technologies enter parabolic trajectories, large cap companies can lose market share at alarming rates, suggesting that traditional style-box and benchmark-sensitive strategies should find hedges against such disruption,” according to ARK.
Automation software is now able to connect the entire manufacturing process from project creation to equipment maintenance. Enabling industrial equipment to sync with management software gives managers the ability to make decisions quicker and more efficiently to ultimately produce a better result for the business.
With rapid change afoot, advisors and investors need to think about disruption in a different way and eschew old school metrics.
“Because technology is permeating every sector of the global economy, innovation cannot be boxed into sectors, geographies, or market caps,” said ARK. “Traditional market capitalization and style-focused equity strategies are centered around benchmarks and indices which are backward-looking and do not adjust rapidly to change.”
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.