Innovative exchange traded fund investors should focus on the critical importance of having a long-term investment time horizon and should not fear short-term losses or volatility.
In the recent webcast, Volatility is Not a Bad Word When You Have a Long-Term Time Horizon, ARK Invest’s Renato Leggi, client portfolio manager, argues that innovation platforms including artificial intelligence, robotics, energy storage, DNA sequencing, and blockchain technology, will generate significant equity market returns over time, especially when compared to traditional market segments.
For example, artificial intelligence is projected to experience a compound annual growth rate of 26% over the next decade, battery technology has a projected CAGR of 35%, blockchain a CAGR of 43%, robotics a CAGR of 51%, and gene sequencing a CAGR of 40%. In comparison, non-innovation equity capitalization is estimated to experience a CAGR of 3%.
However, the innovation theme can experience greater bouts of short-term volatility, which can be partially attributed to ARK Invest’s management style. Leggi explains that while investors flocked to the safety of benchmarks during uncertainty, ARK did the opposite.
“Volatility has become synonymous with risk, but it is just a measure of past price movement. ARK believes volatility is not a ‘bad word.’ In fact, our research suggests that in a total portfolio, including healthy innovation exposure, volatility does not spike because of innovation’s diversifying nature against traditional value and traditional growth,” Thomas Hartmann-Boyce, client portfolio manager, says.
Hartmann-Boyce points out that ARK aggregates the highest-weighted positions in the portfolio by combining an iterative top-down and bottom-up investment process. As opposed to some managers who offload risk by diversifying their portfolios during a market contraction period, ARK opportunistically consolidates into its highest-conviction stocks. In a market expansion environment, ARK strategically initiates positions.
When things settle down, the innovation theme could generate robust returns on the rebound, since an innovation-focused strategy was previously hit harder, so investors don’t want to miss the rebound, Leggi says, adding that traders shouldn’t try to time the markets either. Leggi also argues that long-term investors or short-term contrarians should look at these pullbacks as an opportunity as well.
The real risk could be being under-allocated to innovation in a total portfolio with a long-term horizon.
As a way to invest in innovation, investors can look to something like ARK Invest’s flagship ARK Innovation Fund (NYSEArca: ARKK), which seeks to invest in the cornerstone companies taken from the healthcare, technology, and industrial sectors that focus on investing in disruptive innovation. Such companies may include ones that benefit from big data, cloud computing, cryptocurrencies, the sharing economy, genomic sequencing, molecular medicine, agricultural biology, 3D printing, energy storage, and autonomous vehicles.
The actively managed fund includes companies that merge healthcare with technology and capitalize on the revolution in genomic sequencing. These companies try to better understand how biological information is collected, processed, and applied by reducing guesswork, enhancing precision, and improving our quality of life.
The technology component focuses on the next generation of internet names. These tech companies benefit from the shifting bases of technology infrastructure to the cloud, enabling mobile, infrastructure & services, internet-based products and services, new payment methods, big data, the internet of things, and social distribution & media.
Lastly, the industrial exposure covers a so-called new industrial revolution or advances in autonomous vehicles, robotics, 3D printing, and energy storage technology that are enhancing productivity, reducing costs, and transforming the manufacturing landscape.
Financial advisors who are interested in learning more about the long-term benefits of innovation can watch the webcast here on demand.