Summary
ARK Innovation ETF has significantly underperformed YTD, an unsurprising feat given the portfolio.
Innovation investing is incredibly hard, even for industry insiders (i.e. Google). It requires picking not just the industry but the company.
We expect that ARKK will dramatically underperform the market in the upcoming years based on these factors.
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Cindy Ord/Getty Images Entertainment Cathie Wood’s (NYSEARCA: ARKK ) has more than $20 billion of assets, as it became the darling for technology investors of the COVID-19 recovery. However, it’s heavily underperformed the S&P 500 (NYSEARCA: SPY ) to date and in our opinion will continue to underperform for the long run. Our thesis is simple – we don’t think ARKK understands innovation investing. Innovation
A generalized claim to make for sure, so we’ll break down our thesis into 3 parts to focus on our claim.
1. Rarely does the first wave of companies from a new technology / industry garner the long-term profits.
2. Innovation is about more than new technology, to succeed, it has to tangibly improve human experiences and lives.
3. Innovation is a risk-fraught business with numerous sources for disruption and risk. Waves of Companies
In any new industry, companies often come in waves with the previous wave removed by the success of the upcoming wave.
For technology, you had IBM / Cisco / Intel / HP as Wave 1 companies, Yahoo / MySpace and the “Dot Com” bubble as Wave 2 companies and then Facebook / Google / etc. as Wave 3 companies. In each case, the arrival of the next save put strong financial pressure and growth pressure on the previous waves. In many cases, members of those waves went bankrupt .
The same we expect to be true with many new sectors emerging. That means that even if those sectors becoming significant long-term sectors, the companies to gain the largest valuation and make the most profit might not even exist yet. That’s the massive risk that’s present in individual stock investing. Tangible Improvements
At the same time, we want to note that picking and choosing innovations to invest in is incredibly difficult because you need to provide tangible improvements for customers over competitors. The Zillow Group (NASDAQ: Z ) (NASDAQ: ZG ) recently saw this with their very expensive exit from the home buying and flipping markets they attempted to enter.
Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) has seen this through innovations like Google Glass, a cool gadget but one that was never interesting enough to hit mainstream use. In our view, ARKK’s portfolio is fraught with companies that have this same issue of a minimal lack of significant tangible value provided over their competitors to outshine.
Tesla (NASDAQ: TSLA ), the portfolio’s largest holding at a >10% share, is a classic example that we’ve discussed before . The company is entering a new and exciting market (EV) that does have tangible growing benefit to consumers and customer support. What Tesla doesn’t have is any unique advantages over competitors such as Lucid Air ( LCID )/ Rivian ( RIVN )/ Ford ( F ), etc. As they ramp up production, we expect Tesla has peaked (especially with its current valuation).
Coinbase (NASDAQ: COIN ) is another example of that. Cryptocurrency is an exciting innovation and the blockchain has numerous potential for industry revamping and changing. However, Coinbase itself offers no substantial unique benefits over other crypto exchanges, besides being one of the most well-known, and crypto itself is a very volatile market.
We feel that ARKK has attempted to invest in sectors by picking companies in those sectors with no significant differentiating factors, adding to its portfolio’s risk, and increasing the chance it’ll be unable to match the growth of those sectors. Risk and Diversification
One of our favorite websites for the risk and diversification needed for industry is Killed by Google . The website chronicles the failures (243 to date) that Google has had in projects that it’s attempted to launch and go global with that haven’t failed. These are primarily technology projects from one of the most successful technology companies in history. From all these failures, Google now drives most of its revenue from its top 4 current most successful products.That’s a success rate of <2%. The Ark Innovation ETF has 50% of its portfolio concentrated within its top 9 investments. Many of these investments are uniquely focused […]
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