Investing in Innovation

By Ethan Currie, Staff Writer

The S&P 500 index has returned an average of roughly 10.5% every year since its inception in 1926. Acting as a benchmark for the overall market, investment firms have been attempting to outpace S&P returns for decades. While many portfolio managers offer risk-averse solutions, other firms take a different approach in attempting to maximize investor gains. In this regard, ARK Invest has caught the attention of many, due to their thematic investment decisions, as well as their shocking performance as of late.  

Founded in 2014 by current CEO and CIO, Cathie Wood, ARK Investment Management, LLC is an American investment management firm based in St. Petersburg, Florida. The University of Southern California alumni was the CIO of global thematic strategies at AllianceBernstein (AB), prior to 2014. After Wood’s idea for actively managed exchange-traded funds (ETFs) based on disruptive innovation were deemed too risky by colleagues at AB, she left – and ARK was born.

With six different active ETFs, and three index ETFs, ARK has a solution for every investor looking to capitalize on “the largest technological transformation in history”, according to their website. The objective of ARK ETFs is to invest in the future by recognizing underestimated, or misunderstood companies that are spearheading disruptive innovation in our world. ARK’s investment process aims to identify innovation early, exploit the opportunities that follow, and provide long-term value to investors.

Although the definition of disruptive innovation could vary, ARK best defines their investment targets as industries and products they believe are the “innovation platforms leading the global economy into what could be the most transformative period in history”. Such platforms include artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technologies – platforms with innovative potential that ARK compares to historical disruptive technologies such as the telephone, automobile, and electricity.

ARK active ETFs include funds focussed on innovation (ARKK), autonomous technological and robotics (ARKQ), next generation internet (ARKW), genomic revolutions (ARKG), fintech innovation (ARKF) and space exploration (ARKX). Index ETFs include a 3D printing fund (PRNT), an Israel innovative technology ETF (IZRL), and the ARK Transparency ETF (CTRU).

Despite potential for abnormally large returns from an innovative portfolio, ARK ETFs also bear unconventionally large risk as a result from their disruptive exposure. This is evident from the extreme volatility that ARK funds have experienced since their inception, and especially in the past two years. ARK’s flagship fund, the ARK Innovation ETF (ARKK) has become one of the most popular investor solutions during the COVID-19 pandemic.

Currently boasting an average (3 month) daily share volume of 19,111,520 and an AUM of over $12 billion USD, the ARK “Flagship” Innovation ETF (ARKK) has made headlines regardless of its performance. Since reaching an all-time high of $159.70 on February 16, 2021, ARKK ETF shares have dropped nearly 60% to its current trading price of $64.80 (as of February 18, 2022). However, this bearish year for ARKK was only after the fund’s incredible 2020 rally, where the flagship fund appreciated by roughly 360%, from $34.69 to its all-time high price.

The excitingly volatile performances by ARK Invest ETFs have caught the eye of many investors, especially in the past two years. Unmatched growth experienced during the heart of the pandemic, followed closely by a tremendous technological sell-off period has demonstrated the investment risks associated with disruptive innovation. Clashes between investor concerns and positive management forecasts begs the question – will ARK ETFs disrupt the market once more, or will failed innovative platforms sink their flagship fund?

Photo by fabio on Unsplash

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