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The Innovative Future Of ETFs

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Ark Invest is driving a new generation of actively managed ETFs. As opposed to the traditional passive ETF that tracks some sort of benchmark, whether it's an index, commodity, or other financial asset, Ark's Innovation ETF (ARKK - Free Report) is focused on driving alpha (market outperformance). The ETF has been enormously successful in this endeavor, with 100% returns in 2020 thus far.

Ark's Investment Strategy  

This unique investment group, run by revolutionary investor Cathie Wood, is focused on finding the next "disruptive innovation." The firm is looking to invest in enterprises that will change the world in the Roaring 20s.

In a Forbes interview, Wood discussed this revolutionary ETF group and its strategy, saying, "disruptive innovation is often not priced correctly by traditional investment strategies because people may not understand how big the ultimate opportunities are going to be. They aren't sizing the opportunity, and they aren't analyzing the disruption."

The firm is focused on being early movers on next-generation businesses, and their top holdings reflect this target.

Holdings 

The fund is making a big bet on the future of healthcare and the information technology segment, with these 2 sectors making up 68% of the fund's allocation. You can see the ETF's top 10 holdings from ARKK's fund overview below.

Each of these holdings is disrupting/shaping the current space in which they operate with revolutionary innovation.

Tesla (TSLA - Free Report) , the largest ARKK holding, has completely disrupted the global automotive industry with its cutting-edge electric vehicles (EVs) slowly but surely taking over the automotive world. With massive delivery growth annually (despite the pandemic), a so-far successful Shanghai Gigafactory and the Berlin Gigafactory expected to start production next summer. The future for Tesla's EV empire is bright, and it appears that Ark believes it's worth more than $400 billion (TSLA's current market cap).

Gene testing enterprise Invitae (NVTA - Free Report) and gene therapy innovator Crispr Therapeutics (CRSP - Free Report) will change the world of healthcare forever. With the ability to identify and replace faulty genes, diseases and disabilities may become a thing of the past. This technology has been seen as controversial because it is literally altering a human's DNA. This week, the developers of this genome editing technology won the Nobel prize, giving this revolutionary technology more legitimacy in the markets' eyes. This provides genome focused equities with a strong tailwind this week.

Square (SQ - Free Report) has taken control of the fintech market as it captures the massive small-to-midsized business segment and a growing presence with large-cap enterprises. Roku (ROKU - Free Report) is the streaming hardware king with 50% market share. Proto Labs (PRLB - Free Report) is the next generation of 3D printing manufacturing for low-volume items.

The rest of ARKK's holdings are equally as exciting, and I implore you to research some of them as I am sure you will be as fascinated as I was by the advanced technology these enterprises are involved in.

Performance

This stock has driven 100% returns and created an alpha over the S&P 500 of 84% so far in 2020. ARKK is sitting at all-time highs while the broader market and even the innovation-driven Nasdaq-100 remain hampered this past month.

2020 has been a banner year for this ETF. The rapid digitalization that the pandemic forced on the world drove accelerated interest in economic progress. ARKK's holdings in the next disruptive technologies have gained enormous traction in the markets, which you can see reflected in this ETF's returns.

Risk

There is a sizable amount of short-term volatility risk involved in this ETF as the businesses that Ark is investing in are early adaptors. The holdings valuation multiples are quite large and ambiguous, given the opaque nature of its future success. With the most significant portion of these businesses' earnings occurring years (even decades) in the future, it isn't easy to estimate performance accurately. The longer the time horizon, the greater the uncertainty.

Final Thoughts

I am confident that Ark Invest has done its due diligence and that the long-term value in its holding will be demonstrated through the Roaring 20s.

I may be hesitant to buy ARKK at its current all-time highs today, but I am a buyer on dips.

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