Attracting a New Type of Investor
It’s safe to say that the ARK hype has cooled down a tad, and its six-month inflow of 27.22% doesn’t precisely stack up against its near 2000% three-year inflow. ARK’s ETFs were a hot topic under retail traders during 2020, but 2021 has really been a story of cryptocurrencies and meme stocks for those very traders.
If one manages to look past the speculative noise, you could actually recognize that ARK’s Innovation ETF is a solid long-term investment. The scope of innovative technology stocks is increasing, and hypergrowth industries aren’t as scarce as they used to be.
ARK’s portfolio allocation is predominantly focused on Cloud-Computing (13.7%), E-Commerce (11.9%), and Digital Media (11.3%). These markets are finding consolidation as they’ve become necessities to modern society.
Furthermore, from an income-only vantage point, you’d have to say that you’re getting a good bang for your buck. The fund pays out 16.33% more than other ETFs, at a 3-year CAGR of 182.85%.
Exponential Institutional Buying
Institutional investors have noted the ETFs prospects, resulting in a 300% increase in institutional ownership (34.49% total) since June 2020. Notable holders include Morgan Stanley (NYSE:MS) (5.92%) and Bank of America (NYSE:BAC) (2.97%).
This trend tells us that we could be heading towards a positively skewed environment, where the size of incremental price spikes will exceed the size of incremental drawdowns.
Finally, there is still the 65.58% of the ETF not owned by institutions. ETFs are often 90%+ institutionally owned; if this ETF experiences a similar trend, some serious liquidity could be on its way, meaning plenty of upside in the asset’s price.
Recent Rotations & Growth Ratios
My confidence in Catherine Wood’s portfolio strategy increased when she recognized Chinese politics and U.S. regulatory demands as a severe threat to Chinese ADRs (American Depositary Receipts), instead of brushing them aside and claiming that Chinese stocks are a dip-buying opportunity.
Wood and her team’s portfolio management competency can’t be questioned, as they rely on facts instead of hope.
The ETF has made a few positive rotations of late, all trading at low PE Growth ratios.
Some of its top 10 holdings with undervalued PEG Ratios are: Zoom (ZM) (0.07), CoinBase (COIN) (0.3), Tesla (NASDAQ:TSLA) (0.92), and Square (SQ) (0.51).
Recent additions with no PEG ratios include Robinhood (NASDAQ:HOOD) and Draftkings (DKNG). Both of these companies have been under scrutiny as of late and have much to prove, but I believe that upsizing the fund’s position of Draftkings, at year-over-year revenue growth of 197.97%, will pay off.
An exponential increase in institutional ownership of ARK’s Innovation Fund along with the consolidation of key portfolio focus industries could mean that upside is on the horizon. Catherine Wood’s decision to exit China is a sign of competency. Additionally, the fund seems to ensure it invests in stocks with predominantly low PEG ratios, ensuring that prices are justified by growth rates.
Disclosure: At the time of publication, Steve Gray Booyen had a position in any of the securities mentioned in this article.
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