The highly anticipated launch today from the ARK ETF family is a space exploration fund that’s designed to focus on some of the most disruptive technologies and investment opportunities in this segment. The ARK Space Exploration & Innovation ETF (ARKX) is not the first ETF to offer access to space exploration, but as expected, it is delivering on ARK’s well-known high-conviction DNA under the hands-on active management of Cathie Wood. We catch up with her to go behind the vision for ARKX, and its unique mix of holdings.
ETF.com: What's the opportunity in space exploration as an investment theme?
Cathie Wood: Space exploration sounds like a very big idea, and it is. It involves the convergence of more of our platforms and technologies than any of our other themes. We're talking about rockets and robots; mobile connectivity; 3D printing; robotics; sensors; deep learning; artificial intelligence—we rarely see the convergence of this many technologies.
The two biggest growth opportunities in this space are in, first, mobile connectivity—we’ll be able to serve the half of the global population that doesn’t yet have mobile connectivity. Second, hypersonic flight—think of being able to fly from New York to Japan or Australia in two hours.
The Concorde didn't make it for the reason most technologies don't make it: costs were too high and the technology wasn't ready. But now the costs associated with all kinds of technologies—including rocket and satellite launches, antennas and the rockets themselves—have reached a level where all of this is going to become possible.
A lot of people think about the opportunity as us flying to the moon. Within my lifetime, I hope that happens. And many people think about space tourism. But we think the first and most remunerative opportunities are going to be mobile connectivity and hypersonic flight in the next five years.
ETF.com: If one of the biggest opportunities here is in connectivity, can’t you already access these kinds of names in other funds, including some of your funds already?
Wood: Yes, and some of our funds do, because space exploration has been evolving as a theme. When SpaceX was able to reuse rockets, that was a real breakthrough in space exploration, and the technology's just now moving into motion for this.
Tesla, Amazon and several other companies are launching satellites because they really want to change the world. They want the 3.5 billion or so people who don’t have any mobile connectivity to enjoy it for the first time.
Satellite technology was too expensive, and there was too much latency before low-earth orbital costs came down to a low-enough point so that Iridium, SpaceX and Amazon could launch these satellites and have them cover the globe.
I think the number of active satellites last year was approaching 3,000. We think that, because costs have come down enough and we've got motivated companies, satellites planned now are 25,000+.
ETF.com: What's the universe of companies like for ARKX? Is it mostly small cap companies full of risk that have yet to turn a profit? Or are there a lot of names, as you mentioned, like Amazon?
Wood: Sometimes it takes big companies to launch big ideas. So we have Amazon and some of the bigger companies like Lockheed Martin and Boeing that are doing a lot of work in that space.
They're also doing a lot of work in the drone space. Many people don't think of drones as being part of the space theme, but they are, literally. The combination of the rocket business and the drone business puts some of these larger cap names really at the leading edge. We also have smaller companies dedicated to unmanned aerial vehicles, like AeroVironment, in this portfolio, which is a $3 billion in market-cap stock.
Another interesting stock is Trimble, a company we’ve owned in our autonomous technology and robotics fund because it is, thanks to GPS, controlling construction sites and mines. As we go autonomous, this is the technology that space will enable. The latency associated with low-earth orbital satellites is enabling many older-world businesses or industries to increase their productivity tremendously.
You might be surprised to see JD.com among the top 10 holdings. JD in China has a logistics company that is one of the most sophisticated logistics companies using drones especially to help with supply chain management. It must have one of the best supply chain network organizations in the world. The inventory days they need on hand with their network is roughly 25% less than other companies in the e-commerce space.
Finally, Iridium is in the low-earth orbital satellite business. In the dot-com days, Iridium started with the big-brick phones, which were our first wireless phones. They're not in that business anymore, but they never lost their low-earth orbital stripes, and now they're going to be a big contributor to mobile connectivity.
So, we run the gamut. As with most of our funds, ARKX is multicap.
ETF.com: Some may be surprised that Virgin Galactic is not really represented in ARKX. Why is that?
Wood: Because right now it’s more focused on space tourism as opposed to the two big opportunities we think will deliver really good economic results: mobile connectivity and hypersonic flight. It’ll probably get into hypersonic flight, but we need to see it add that to its long-term business plan before we’d push this further up in our portfolio.
The compound annual rate of return we expect from this portfolio during the next five years is 20% on average per year, as of today. You'll have some companies growing in the 10-15% range; you'll have other companies growing in the 30-40% range.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
ETF.com: ARKX will go head-to-head with a couple of ETFs, including the Procure Space ETF (UFO), which was the first in this segment, and is an index-based ETF that enlisted a former director at the Space Foundation to help build its index. UFO set out to be a pure-play ETF in space exploration. How does ARKX compare?
Wood: UFO is a lot smaller in cap. It's concentrated—it has 32 positions—and in the top 10, it has the smaller cap names and has saved the larger cap names for the bottom of the portfolio. Most of its top 10 are in satellite radio/TV, and we have little to no involvement there. We think it’s a very mature industry.
I also don't see in UFO as much of a focus on hypersonic flight. I think you'll need some of these big companies that have expertise in drone technology from a defense point of view. That's where a lot of the technology has developed. The Defense Department is a tremendous source of new technologies.
ARKX and UFO actually overlap on only three names: Trimble, Iridium and Garmin. The portfolios aren’t very much alike. We are also active, so we can take advantage of opportunities around volatility, while they are passive.
ETF.com: ARK has been running a space exploration fund in Japan for a couple of years. It's not the first time you've done that. What about the Japanese market makes it an interesting place to test out, if you will, new ETF ideas?
Wood: It actually works both ways. We started our Genomic Revolution portfolio here and migrated it to Japan. They got pretty excited about it. In terms of space exploration, we started it in Japan. That market is driven by the distributor base—the demands from distributors listening to their clients.
These ideas bubble up and they go through a due diligence process at our partners, Nikko Asset Management. If they feel a portfolio is ready for prime time, they often come to us. The fund—maybe because it was a little ahead of its time—is only now starting to scale. So in terms of having a sizable space portfolio, that'll probably happen in Asia and U.S. at roughly the same time.
The first time that happened was fintech. We started with them on fintech in 2016. We thought it wasn't a big enough theme then, that it wasn't ready for prime time. But because they’re so much closer to what was happening in Asia, and the idea of digital wallets, they debuted well before we did it here in the U.S.
Japan thought it was ready for prime time, and Japan was right. We didn’t have it on our product roadmap until 2019, which is when we launched in the U.S. But the explosion in mobile payments in Asia mushroomed, more quickly than we ever thought. It has entered our economy here much more slowly. Venmo has been around, and Cash App is fairly new, and just now they’re both really starting to scale.
So, the U.S. was behind on that and influenced our perceptions to some extent. It’s nice to have a partner in Asia who has a finger on the pulse as far as how quickly things are evolving in Asia. In terms of space, it bubbled up from the distributor base, and Nikko asked us if we could do it. We thought it was ahead of its time, but we did it, and maybe the fund was a little ahead of its time because it's only now starting to scale. That'll probably happen in Asia and in the U.S. at roughly the same time.
ETF.com: With the success you've had with “ARKK” and your other ETFs, there’s a lot of pressure on you to deliver another blockbuster, especially as an active manager. How do you measure success in your ETFs?
Wood: We’re not doing anything differently this time. We've been gratified at how well our ETFs have been received and how well our research has been received, which I think is key.
We've been telling our clients and anyone who would listen that, for our kinds of strategies, you need a five-year time horizon. We go through a period, like the coronavirus, and had no idea how that was going to end. We took a point of view early on and leaned into it, became very aggressive with our strategy, concentrating our portfolio toward our highest-conviction names. That worked out really well.
In the last month or six weeks, we’re seeing an acceleration toward the value and more cyclical stocks at the expense of our kind of stock. And after nearly 150% appreciation last year, to be down 10% this year doesn’t shock us. But here’s why I'm taking comfort from what’s happening right now: our five-year time horizon.
At the peak in February, the compound annual rate of return we were expecting from the stocks in our flagship portfolio was 15%. Our stocks have done a lot of heavy lifting. They were still going to deliver 15%, according to our estimates, but we were getting close to dropping below that 15%.
We were taking profits from a lot of stocks that had dropped well below that 15%. Today, after the correction we've been through and the way we've reoriented the portfolio, we believe the compound annual rate of return from our portfolios for the next five years will be closer to 25%. We're as excited as ever.
Contact Cinthia Murphy at [email protected]