I’m a big fan of Cathie Wood and her ARK Invest. But I’m not nearly as big a fan of the recently launched ARK Space Exploration & Innovation ETF (BATS:ARKX). ARKX stock has a few key flaws.
Certainly, some investors are interested. The fund saw nearly $300 million in inflows during its first day of trading, the eighth-best debut in history according to Bloomberg. On top of that, Wood’s involvement alone is a big plus.
After all, Wood and ARK have been among the best growth investors of recent years. Simply put, they’ve been ahead of the trends. They’ve earned their success.
But, although I might recommend other ARK exchange-traded funds (ETFs), there are a few reasons I can’t quite get behind ARKX stock. In my opinion, investors who are bullish on space probably can do better. Here’s why.
ARKX Stock: A Lack of Concentration
One of the notable issues with ARKX stock is that its holdings don’t necessarily seem like those of a “space ETF.” In fact, the second-largest holding is another ETF that focuses on 3D printing. And while 3D printing has obvious use cases in creating spacecraft components and could eventually be used to manufacture replacement parts in space, investors bullish on that aspect of the industry simply can buy 3D printing stocks.
That same problem holds elsewhere in the 39-holding portfolio, which includes a streaming video player, a Chinese e-commerce company and an electric-truck manufacturer. Those stocks have their virtues, but for the most part they have little direct, material connection to space exploration in particular.
To be fair, it’s not as if ARK is misleading investors. The fund is supposed to provide exposure to four different kinds of companies: “orbital and sub-orbital aerospace, enabling technologies, and beneficiaries of aerospace activities.” That latter group, for instance, includes agricultural stocks who could benefit from pinpoint GPS (global positioning system) accuracy.
But if an investor simply is bullish on direct plays on space, ARKX stock is a bit too broad. True, the fund has holdings that have some logic on their own. However, as a whole they detract from the core thesis that the fund is supposed to play.
The Fee Problem
Because this ETF is actively managed, the holdings in it can and will change over time. However, also because it’s actively managed, the ETF’s fees are higher.
ARKX’s 0.75% expense ratio — the percentage of assets that go to expenses — actually isn’t that high for an active ETF. But it’s still meaningful. Expenses on broad index funds get as low as just a couple hundredths of a percentage point.
And in a zero-commission world, investors can build their own portfolios for essentially zero cost. Saving three-quarters of a percentage-point annually doesn’t sound like much, but it adds up.
Assume a portfolio grew 10% annually for ten years. With no expenses, an investor at the end of that decade would have seen appreciation of 159%. Expenses of 0.75% reduce that return to 142%. That’s obviously not an insignificant difference. And if the returns are higher, the gap is larger.
The Selection Problem for ARKX Stock
Now, the fee is worth paying for some ETFs. But for an ETF targeted to space bulls, I’m not sure that’s the case.
After all, there’s one important thing to remember here: there simply aren’t that many space stocks. In terms of actual private space exploration, there are only a handful, thanks largely to the boom in special purpose acquisition companies (SPACs). Even expanding the definition to satellite operators or ancillary plays, the category is still somewhat limited.
This creates two problems.
First, investors can build their own space portfolios. Given the high risk and high reward in the group, they can use a “basket” approach similar to biotech investing. Owning multiple exploration companies may well mean that one stock rises by multiples while others plunge — but the winner (or winners) can more than offset the losers.
Second, the value of selection in a limited group simply isn’t that high. ARKX stock provides ownership of 39 names. But it’s not as if there are hundreds to choose from. Even using ARK’s broad criteria for inclusion, the universe is constrained.
So, investors in ARKX stock aren’t getting the “best” space stocks. Instead, they’re simply getting most of the space stocks. That’s not a great thing. In fact, it kind of defeats the point of having ARK manage the fund in the first place.
For a manager with such a great track record, investors should want a far larger pool of ideas. That’s where ARK has created value so far. I don’t think ARKX quite measures up.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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