Key Points
ARK Innovation ETF is an actively managed fund that invests in companies pursuing disruptive innovation.
Such stocks have been highly volatile.
Long-term investors might nevertheless appreciate the prospects these companies have to make important contributions to their respective industries.
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With many exchange-traded funds, all an investor needs to believe is that the stock market will continue to rise. With more than a century of stock market history supporting that idea, that's not a big ask. But when you move into the realm of actively managed ETFs, you have to believe in the vision that the fund manager has for the future. In the case of ARK Innovation ETF (NYSEMKT: ARKK), fund manager Cathie Wood has been quite open about her expectations and what she's hoping to see from the companies whose stocks you'll find in her portfolio.
This final article on ARK Innovation for the Voyager Portfolio focuses on the investment case that Wood sets out for her flagship ETF. If you agree with it, then this ETF might make sense for you. If not, it's still valuable to understand the views of an influential fund manager and how they relate to what's happening in the stock market right now.
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Cathie Wood and technological convergence
Wood's thesis for ARK Innovation ETF focuses on five major platforms for innovation. Artificial intelligence is the one that's getting the most attention right now, along with the related efforts in robotics that uses that AI technology to fuel autonomous decision-making and work. Public blockchains have gotten a lot of attention with the establishment of Bitcoin (CRYPTO: BTC) and other digital assets. Energy storage has become a vital part of the electrification trend in areas like mobility and renewable power. And finally, the multiomics trend is getting the least attention from the general public, but this revolutionary approach toward biological sciences gears itself toward developing precision therapies that could personalize medicine and lead to unprecedented breakthroughs.
Wood believes that as these disruptive technologies integrate with each other, they create a positive flywheel that accelerates advances in all of them. So far, AI has been the most important catalyst toward technological advances. However, the ARK Innovation ETF manager sees robotics making big strides forward, particularly in the area of reusable rocketry for space launches.
How people benefit from disruptive technology
Wood sees disruptive technology's primary benefit being the ability for people to use their time more productively. For instance, robotaxis allow passengers to do work instead of driving, while also making more efficient use of vehicles. The resulting economic activity involved in disruptive innovation boosts the overall economy for the benefit of all.
For investors, the fact that macroeconomic statistics fail to take into account the true value of personal economic activity creates an opportunity. If homeowners value the work they do on maintenance and upkeep more highly than the cost of a robot that could do that work for them, then they would rationally choose to purchase the robot. Yet in terms of economic output, the work involved in producing the robot gets included in gross domestic product figures when the homeowners' own work is not. Moreover, if the homeowners engage in economically productive activity of their own with this newfound free time, the effect is even larger.
The difficulties of diversification
Agree with it or not, Wood's thesis leaves a major challenge: how best to translate it into a portfolio. ARK Innovation has its investments spread across diverse industries including autonomous mobility, neural networks, smart contracts, advanced battery technologies, and programmable biology. Although the thesis assumes advances in each area will eventually raise all boats, the ETF's experience has often seen widely disparate performance within the portfolio.
The Voyager Portfolio prefers to take a less aggressive approach toward innovation, and so it won't be purchasing shares of ARK Innovation ETF. Nevertheless, for those who truly believe that Wood's vision of the future will come to pass, ARK Innovation does a reasonably good job of making that vision investable.
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
