While the ARK Innovation Fund (ARKK) continues to be popular among investors, Cathie Wood’s flagship fund is down 78% from its February 2021 peak. The issues with ARKK have been well documented. It lacks risk controls. It’s overconcentrated in a few tech names. Its stock selection process is based on the intuitions and decisions of one person rather than a disciplined method.
“Wood’s reliance on her instincts to construct the portfolio is a liability,” wrote Morningstar strategist Robby Greengold. “Rather than gauge the portfolio’s aggregate risk exposures and simulate their effects during a variety of market conditions, the firm uses its past as a guide to the future and views risk almost exclusively through the lens of its bottom-up research into individual companies.”
For investors who want to invest in disruptive technology with risk controls, the Neuberger Berman Disrupters ETF (NBDS) invests in companies that pursue disruptive growth agendas that the portfolio management team believes will shape the future and can invest globally across market capitalizations. Rather than use traditional sector classification, the fund instead uses a disciplined process to seek highly innovative companies consistent with a longer-term investment horizon.
The portfolio team has access to daily analysis on six terabytes of data through machine learning, language processing, and cloud computing techniques. This includes SKU-level transaction data, search data, and conference call transcripts, complementing its fundamental analysis to result in a rigorously developed and highly targeted portfolio of roughly 30 companies.
Unlike ARKK, NBDS has disciplined risk controls. The Neuberger Berman fund seeks to own higher-quality names, with fundamental sell discipline and attention to factor risk.
The ETF invests in names the portfolio management team believes to be worth owning in any macro environment. With a focus not only on free cash flow but also the sources of free cash flow, NBDS includes only those stocks where a disruptive process/technology is mature enough to contribute to the bottom line and durable enough to withstand downside scenarios.
This approach seems to be working. Since its inception, NBDS has outperformed ARKK by nearly 3,000 basis points.
“Getting growth right is likely to be more difficult going forward than it was in the past, perhaps requiring more attention,” said Neuberger Berman ETF specialist Fred Edwards. “As investors evaluate options for growth, it’s becoming increasingly important for investors to ask whether or not the tools in their toolkit are compensating them for the risk they’re taking.”
NBDS is one of three actively managed ETFs that Neuberger Berman launched in April. The ETFs are an extension of the firm’s thematic equity investment capabilities using traditional fundamental equity research along with alternative data capabilities and consideration of material environmental, social, and governance factors.
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