Beware The Value Traps In Indexes

January 27, 2017

Catherine Wood, founder and CEO of ARK Invest, is a big believer in the power of disruptive innovation. It’s what ARK’s entire investment philosophy is built around. The firm, with five ETFs under the ARK brand, has teams of analysts researching everything from 3D printing to autonomous vehicles that find coverage in its ETFs. caught up with Wood at this week’s Inside ETFs conference for a brief interview. What do you see as the opportunities in the current market environment?

Catherine Wood: We’re all about disruptive innovation, all about the future, and we have never seen so many technology platforms evolving to serve the future. They're going to be very disruptive. There’s the genomic revolution—DNA sequencing is critical to that theme.

There’s the next-generation internet—so artificial intelligence, machine learning, and the internet of things is critical to that. There’s robotics and automation, which includes autonomous taxis; we see that theme evolving much faster than people now think, with Tesla leading the charge, for example.

We see energy storage changing dramatically. We’re going to move from the internal combustion engine to electric vehicles; we think within the next five years there will be demand for 30 million electric vehicles around the world, versus less than 1 million sold last year—so, huge opportunities.

The last technology platform that we’re exposed to is blockchain technology. We’re exposed to it through an OTC instrument called GBTC, which is the Bitcoin Investment Trust. We were the first—and I think the only—public asset managers with exposure, certainly in the ETF space, to that.

Right now, the whole bitcoin platform is a $14 billion platform. We think it’s going to end up in the trillions. So we’re looking for big ideas, the next big thing. That's what we’re all about.

And what we’re also all about is creating portfolios that are complements to more traditional portfolios out there. They don’t have what we have in our portfolios. Our portfolios are extremely active. What they have in their portfolios are more value traps than they now realize, if we’re right on our research. If they complement their portfolios with ours, they will have an automatic hedge against disruption. What does disruption mean for a portfolio? For example, if autonomous vehicles take off, will that damage traditional car dealers?

Wood: Yes, it will damage all of the traditional auto ecosystem, whether it’s the manufacturers, the dealers or the after-market auto parts. It will change the insurance industry radically, because 90% of all fatalities are caused by human error in cars. If you take away 90% of the fatalities, the structure of the auto insurance industry and life insurance industry has to change drastically.

It’s going to change infrastructure. We’re not going to need 80% of the parking places if we’re right on autonomous taxis. We have five parking spaces for every vehicle now. We’ll only need one in the future for each autonomous taxi.

So that will change the real estate industry toward maybe more office buildings and more retail, although bricks and mortar seems to be going away too. Even in our own homes, that third or second garage space will be turned into an office or a playroom. It will enhance real estate that way as well.


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