Investors should keep an eye on innovative platforms-related exchange traded funds to capture tomorrow’s growth ideas today.
In the recent webcast, Refining Your Innovation Exposure: How to Access Tomorrow’s Opportunities, Brett Winton, Director of Research, ARK Invest; and Thomas Hartmann-Boyce, Client Portfolio Manager, ARK Invest, argue that actively managed strategies are better positioned to quickly adapt to market changes and target areas of potential opportunity to help investors better focus on innovative growth ideas ahead.
The strategists highlight the popularity of passive investment strategies, which have contributed to an increased correlation between broad investments like the Nasdaq-100 and the S&P 500. Broad benchmarks and the funds that track these indices have gravitated toward mega-cap stocks like Facebook, Apple, Amazon, Netflix, Google, and Microsoft.
Consequently, investors are exposed to a lot of overlap, even when investing in broad index-based funds. For instance, the so-called FAANG stocks make up almost 17% of the S&P 500 and 32% of the Nasdaq-100. On the other hand, the ARK Invest analysts point out that ARK believes innovation does not necessarily mean FAANG stocks, which are not included in the flagship ARK Innovation Fund (NYSEArca: ARKK).
Moreover, ARKK provides little overlap with traditional core investment benchmarks, with 3% of the S&P 500 represented in the ETF and 5% of the Nasdaq Index represented in the fund strategy. The strategists argue that ARK aims for a negative correlation of relative returns to traditional value strategies and a low correlation of relative returns to traditional growth strategies.
“ARK aims to identify large-scale investment opportunities by focusing on public companies that are leaders, enablers, and beneficiaries of disruptive innovation,” according to the strategists. “We identify five innovation platforms that are evolving today and enabling the underlying technologies and investment opportunities.”
Specifically, the five innovation platforms include artificial intelligence, energy storage, robotics, DNA sequencing, and blockchain technology. These five sub-categories are expected to enjoy long-term growth. For instance, the artificial intelligence market is expected to expand to $108 trillion by 2030, compared to $10.2 trillion in 2020.
These innovation platforms are long-term growth ideas.
“The market easily can be distracted by short-term price movements, losing focus on the long-term effect of disruptive technologies. We believe there is a time arbitrage ARK can take advantage of. We seek opportunities that offer growth over 3-5 years that the market ignores or underestimates,” the strategists say.
An active touch could capture opportunities in the innovation segment. Innovation investors have crowded into the private markets, while at the same time it seems the public markets have increasingly gone passive. ARK believes innovative public companies with forward-looking growth are the most inefficiently priced part of the market. Specifically, the strategists argue that there are diminishing opportunities in the pre-IPO space and the next big thing may be missing out in traditional market cap-weighted benchmarks. There is room for active managers to capture growth in the public markets by specifically targeting inefficiently priced innovative stocks.
“We believe index strategies tend to miss forward-looking opportunities, and analysts covering disruptive companies could have trouble understanding technology cost curves. ARK’s analysts are organized by cross-sector disruptive innovation themes in an attempt to capitalize on the convergence of research,” the strategists add.
Along with ARK Invest’s flagship ARKK, investors can also look to the ARK Industrial Innovation ETF (NYSEArca: ARKQ), the ARK Web x.0 ETF (NYSEArca: ARKW), the ARK Fintech Innovation ETF (ARKF), the ARK Space Exploration ETF (ARKX), and the ARK Genomic Revolution Multi-Sector Fund (NYSEArca: ARKG) to target innovative segments separately.
Financial advisors who are interested in learning more about innovative strategies can watch the webcast here on demand