many analysts say the portfolio’s concentrated positions — likethe Innovation ETF’s 10% weighting in Tesla — are among itsmost significant downside risks.
The Innovation ETF holds about 48 stocks, with roughlyhalf of its assets concentrated in the top 10 holdings, Arnottsays. Further, there is a liquidity risk in which “trading volumes can quickly dry up when valuations collapse or marketdarlings fall out of favor. If the fund experiences large redemptions, it could be difficult to liquidate some of the holdingswhere it has concentrated ownership,” she explained.
Another concern, raised by John Rekenthaler, Morningstar’svice president of research, is that the cash flows of Ark’s relatively small number of holdings may have boosted the stockprices of these holdings, which in turn boosts inflows. “UntilArk came along, I shrugged off claims that cash flows intofunds influenced their returns. Now, I pay attention,” he said.
But Ark has “a much different view than the broader mar-
1 Deep Learning
ket,” argues Leggi. Plus, “there’s still a lot of short interest
out there, so there’s always somebody that will take the other
side of that trade. And if you believe in the efficient market, it
should balance out over time.”
He also points to the firm’s patience when it comes to wait-
ing for opportunities to build a position. “If we get a stock that
runs up significantly, we’re pretty quick to take some profits
and redeploy it to other names … ,” Leggi explained. “We’re
In addition, he notes, Ark “stocks are actually idiosyncratic
to one another on the technology level. There is low correla-
tion between them. For instance, what’s happening in a DNA
sequencing stock doesn’t necessarily impact what’s going on in
a robotic stock. These stocks move in different ways, and we
can trade around the volatility.”
On their own, these stocks may be perceived to be risky. But
“if you just look at a standard deviation kind of metric” they
are diversified, Leggi said. “Look at our top 10 [holdings]. They
are touching multiple technologies — fintech to digital stream-
ing to gene editing to DNA sequencing — and they move in dif-
ferent directions. So it’s a very diversified portfolio.”
What Ark believes “could be the mostimportant software breakthrough of ourtime” is a form of artificial intelligencethat is turbocharging the industry. Firmresearch sees deep learning adding $30trillion to the global equity market capitalization during the next 15 to 20 years.“We believe that state-of-the-art AItraining model costs are likely to increase100-fold from roughly $1 million today tomore than $100 million by 2025”.
2 Reinventing Data CentersARM, RISC-V and graphics processingunits (GPU) likely will become the newpowerhouse processors and togethercould scale at a 45% annual rate to$19 billion in revenue by 2030. In datacenters, these GPUs likely will becomedominant processors for new workloadsand experience yearly demand growthof 21%, putting the market at $41 billionby 2030.
3 Virtual Worlds
Computer-simulated environments, such
4 Digital Wallets
as video games, can be accessed by any-
one at any time. Going forward, these
virtual worlds will become interoperable.
Ark sees revenue from virtual worlds
compounding 17% annually and hitting
$390 billion by 2025. In-game purchas-
es could grow from $130 billion in 2020
to nearly $350 billion by 2025.
Venmo, Cash App and others couldbecome the new bank branches — andupend banking models. By 2025, a consumer’s digital wallet could grow from abase of about $1,900 today to $20,000.The number of digital wallet users in theU.S. already surpasses the number ofdeposit account holders at the largestfinancial institutions.
5 Bitcoin’s Fundamentals
The cryptocurrency has hit all-timehighs, with firms like Tesla and Squareinvesting in it. This shows that Bitcoinis playing a role as corporate cash, thefirm says. Ark notes that if all S&P 500companies were to allocate 1% of theircash to Bitcoin, its price could increaseby $40,000.
6 Bitcoin: Preparing for InstitutionsArk sees Bitcoin’s risk-reward profile as“the most compelling” among assets,noting it could scale from roughly $500billion now to between $1 trillion and $5trillion in 10 years. More firms are buyingit; insurance giant MassMutual invested$100 million into Bitcoin in 2020.
7 Electric Vehicles
About 10% of the Ark Innovation ETF isinvested in Tesla, so it’s no surprise the firmsees EV sales increasing 20-fold, from 2. 2million in 2020 to 40 million units in 2025.The firm also sees EV prices coming downand reaching parity with gas-powered cars by2023. Further, while EV sales were up 33% in2020, sales of gas-powered cars fell 15%.
Ark predicts that the growing use of automation could add 5%, or $1.2 trillion, toU.S. GDP in the next five years. With themove to more automation, Ark anticipateshigher wages for workers, lower prices forconsumers, higher margins for companiesand higher levels of investment — creatingvirtuous cycles.
Ark’s Big Ideas for 2021