The provider ARK Invest is causing a sensation in the US with high-risk thematic ETFs. After its ARK Innovation ETF posted a 150% return in 2020, the firm has seen staggering inflows - some $5.2 billion in the first few weeks (to February 11) of 2021 alone.
UK investors may be disappointed to find it is difficult to get a piece of the action, though. These ETFs are listed and sold in the US, and accessing them can be complicated and expensive.
Let's first take a look at why the ETFs are so popular.
Innovations that revolutionise old industries with new technologies - known as disruptors - are a common topic in fund investments today. Everyone is talking about digitisation; it is changing the way we work, do business, consume and live. The changes affect virtually all industries and are now visible to everyone. So it's no wonder investors are betting on the drivers of this change.
Often, the talk of "disruptive" companies is somewhat lofty. But there are indeed many new players on the rise, and investors have so much faith in some of them that they are willing to throw all classic valuation metrics overboard.
The consequences of this hype are omnipresent and can be seen most clearly in the area of eelectric vehicles. Tesla (TSLA), for example, saw its share price soar 700% last year and is now worth almost 3.5 times as much as Daimler (DAI), BMW (BMW) and VW (VOW3) combined. Only if all the optimistic forecasts come true and Tesla can dominate the automotive market of the future, does the current valuation seem justified.
What Does ARK Invest do?
The fund industry is responding to this surge in interest with themed funds that target specific areas of digitisation. And one asset manager that focuses exclusively on "disruptive innovations" is US fund house ARK Invest. It invests only in those companies whose products or services have the ability to change old industries through technological change.
ARK Invest was founded in 2014 founded by the former Alliance Bernstein theme fund head Catherine Wood. With a small stable of just seven ETFs, most of them actively managed, ARK is making a splash in the US right now.
Last year, the flagship ARK Innovation ETF (ARKK) surged 152%. The ARK Genomic Revolution ETF (ARKG) rose as much as 180%, and the ARK Next Generation Internet ETF (ARKW) gained nearly 160% (all figures in USD).
It's hardly surprising that investors are snapping up these ETFs like crazy. The company's assets under management have grown exponentially in recent months. While ARK Invest's ETFs had assets of just €5 billion at the beginning of 2020, by the end of September they were already a good €17 billion. But then things really took off. Thanks to immense inflows and strong performance, fund assets had topped €56 billion euros by February 22, 2021.
Monthly Inflows into ARK ETFs since 2018
Can UK Investors Access ARK ETFs?
No wonder that investors outside the US are rying to put these ETFs into their portfolios. But this is not necessarily an easy thing to do. The ETFs from ARK Financial are not authorised for distribution in all countries and gaining access to them may require setting up a specialised brokerage account, which can come at a cost as well as bringing currency risk.
In addition, access to ARK ETFs is more difficult due to the lack of a distribution license. European fund regulation sets high standards for transparency. By their very nature, US funds, which are not intended for distribution outside the United States, do not meet those. This, in turn, is a stumbling block for sales, as few providers are willing to offer private investor products for which, for example, there are no basic information sheets according to EU standards - the so-called KIID, Key Information Documents.
Investors who find all this too complicated, however, can access an ARK strategy through a fund. Through Nikko Asset Management, investors can buy ARK's flagship strategy, ARK Innovation. The Nikko ARK Disruptive Innovation is an open-ended investment fund available to European investors.
It's important to point out, however, that the fund has an incredibly limited track record, having only launched in September 2020, and a fairly high price tag, with an ongoing charge of 1.05% - much higher than a typical ETF.
Investors wanting a piece of the ARK ETF action must weigh up the costs and complexities of investors, alongside the obvious conerns about buying into a hot topic at its height.
A look below at the ARK Innovation portfolio shows that the top holdings are mostly very highly valued and thus now quite vulnerable to corrections. The top holdings are Tesla, rated 1 star by Morningstar, Roku Inc (No Moat, 1 star), Teladoc Health (No Moat, 2 stars) and Square (Narrow Moat, 1 star). My colleague Amy Arnott took a closer look at the ARK Innovation portfolio, which you can read here.
