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How Disruptive is Cathie Wood and Ark Invest?

Known for her unusual and occasionally controversial views on Twitter as well as Youtube, Cathie, or Catherine, Wood is the founder, CEO, and CIO of ARK Investment Management LLC (Ark Invest).

She is also widely known for successfully making a correct prediction on TESLA, where she announced that TESLA will experience a bull run and hit $7,000 to $15,000 in 2024. Today, TESLA’s share price has already surpassed US$880, which is 10 times its low price of US$85 in March 2020.

According to their website, Ark Invest crossed $29 billion in Assets under Management (AUM). Ark Invest focuses on investing in companies that develop technologically enabled new products or services that can potentially change the way the world works. Its holdings include companies in these sectors: Artificial Intelligence (AI), autonomous vehicles, fintech, DNA sequencing, robotics, and 3D printing.

Ark Invest and their Exchange Traded Funds (ETFs)

Let’s first re-visit the definition of an Exchange Traded Fund (ETF).

 

An ETF is a security involving a basket of equities that tracks an underlying index. Most ETFs are passively managed, so the fund manager merely follows the indices which the ETFs are tracking instead of making investment decisions.

However, Ark Invest actively manages their ETFs:

  • ARK Innovation ETF (ARKK)
  • ARK Next Generation Internet ETF (ARKW)
  • ARK Genomic Revolution ETF (ARKG)
  • ARK Fintech Innovation ETF (ARKF)
  • ARK Autonomous Technology & Robotics ETF (ARKQ)

They do also have 2 other passively managed ETFs but the real gains are in their actively managed ones. In 2020, ARK Innovation became their largest actively managed exchange traded fund (ETF), with a whopping 170 percent return.

It is no wonder that Ark Invest is making waves amongst the financial and investment circles.

All their ETFs employ a thematic investing strategy.

What is a Thematic Investing Strategy?

Thematic investing involves finding long-term, future trends and investing in them. Investors have to identify companies who are typically in sunrise industries and invest early, when their values are still under-priced by the market.

For example if you are bullish about medical technology, you can invest in ARK Genomic Revolution ETF (ARKG). Its holdings include Invitae, CRISPR Therapeutics, Pacific Biosciences of California, Compugen, and Arcturus Therapeutics. If this prediction really comes true, the capital gains can be extremely rewarding.

This strategy has been gaining popularity amongst investors in Hong Kong. According to the data from Hong Kong Investment Funds Association (HKIFA), thematic funds have a net inflow of $483.45m in the first quarter of 2020.

So why is thematic investing so popular amongst investors in Hong Kong? Let’s take a look below to find out.

Pros of Thematic Investing

The pros of thematic investing include:

  1. Huge potential capital gains: Extraordinary companies can grow their revenues at a much faster rate than the broader market. Investors who spot winning trends can capitalise on these current, under-priced companies with innovative business models by buying their shares at a discount now and selling them at a higher price in future.
  2. Greater diversification for traditional investors: Thematic investing cuts across market capitalisations, geographiesand sectors – so investors will not miss forward-looking growth opportunities.
  3. Higher versatility: There is no need to simply stick to one theme. Investors can customise their portfolio with different themes, such as renewable energy and medical technologies.

Cons of Thematic Investing

With every reward, there comes risks as well. The cons of thematic investing include:

  1. Susceptible to regulations: The future of new industries is very uncertain. Governments may be more wary of these industries and impose stricter laws and regulations for fear of negative repercussions on society.
  2. Increased risks: Ark Invest ETFs are heavily concentrated in the technological sectors, compared to investing in regular ETFs that comprise of many different types of companies in different industries. Concentrated portfolios are riskier. According to a Morningstar report, 55% of thematic funds launched after 2010 are no longer around in 2020.
  3. Higher management fees: The average total expense ratio of thematic ETFs is 0.59%, which is 0.21% higher than the average expense ratio for equity ETF of 0.38%, according to Morningstar. This means you’ll be paying $21 more in extra fees every year if you invest $10,000 annually. While this may not sound like a lot in the short term, a higher expense ratio will eventually eat into your gains in the long-term.

However, this is not expensive considering that Ark Invest ETFs are actively managed. Many hedge funds charge 20% AUM fee, with an additional 20% performance fee. ARK Invest ETFs do not charge a performance fee and yet have outperformed many of these hedge funds. 

Who is Ark Invest for?

After weighing the advantages and disadvantages, thematic investing are typically more suitable for investors who have long investment horizons so they can benefit from the capital gains.

They need to identify disruptive companies whose full potential may not be realised by the market yet. It takes time for these companies to grow and make profits. 

How disruptive is ARK Invest?

Investing in innovative and disruptive companies in itself shows that ARK Invest does not play by the conventional rules. This translates into many benefits for the society, which include the following:

  • More capital raised for innovative companies: With more capital secured, these innovative companies possess the funding and resources needed for research and development (R&D) as well as expansion.
  • Greater number of unconventional companies in society: With more investments pouring in, this will encourage a greater number of unconventional companies to enter the market to prevent present innovative companies from dominating and getting a lion’s share of the market.

Closing Thoughts

There are greater risks involved in identifying companies that are extraordinary innovators. As such, Ark Invest ETFs are more suitable for investors who have a longer time horizon and can ride out the risks for higher potential returns.

After all, higher risks usually means higher returns. But the fall from the top can be pretty big as well. Just make sure you have a safety net ready for that fall.

*Disclosure: This article does not count as investment advice. Please do your own due diligence before making an investment

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