Page 34 - Investment Advisor April 2021

Cover Story

many analysts say the portfolio’s concentrated positions — like side of that trade. And if you believe in the efficient market, it
the Innovation ETF’s 10% weighting in Tesla — are among its should balance out over time.”
most significant downside risks. He also points to the firm’s patience when it comes to wait-
The Innovation ETF holds about 48 stocks, with roughly ing for opportunities to build a position. “If we get a stock that
half of its assets concentrated in the top 10 holdings, Arnott runs up significantly, we’re pretty quick to take some profits
says. Further, there is a liquidity risk in which “trading vol- and redeploy it to other names … ,” Leggi explained. “We’re
umes can quickly dry up when valuations collapse or market very active.”
darlings fall out of favor. If the fund experiences large redemp- In addition, he notes, Ark “stocks are actually idiosyncratic
tions, it could be difficult to liquidate some of the holdings to one another on the technology level. There is low correla-
where it has concentrated ownership,” she explained. tion between them. For instance, what’s happening in a DNA
Another concern, raised by John Rekenthaler, Morningstar’s sequencing stock doesn’t necessarily impact what’s going on in
vice president of research, is that the cash flows of Ark’s rela- a robotic stock. These stocks move in different ways, and we
tively small number of holdings may have boosted the stock can trade around the volatility.”
prices of these holdings, which in turn boosts inflows. “Until On their own, these stocks may be perceived to be risky. But
Ark came along, I shrugged off claims that cash flows into “if you just look at a standard deviation kind of metric” they
funds influenced their returns. Now, I pay attention,” he said. are diversified, Leggi said. “Look at our top 10 [holdings]. They
But Ark has “a much different view than the broader mar- are touching multiple technologies — fintech to digital stream-
ket,” argues Leggi. Plus, “there’s still a lot of short interest ing to gene editing to DNA sequencing — and they move in dif-
out there, so there’s always somebody that will take the other ferent directions. So it’s a very diversified portfolio.”

Ark’s Big Ideas for 2021

1 Deep Learning one at any time. Going forward, these 6 Bitcoin: Preparing for Institutions
What Ark believes “could be the most virtual worlds will become interoperable. Ark sees Bitcoin’s risk-reward profile as
important software breakthrough of our Ark sees revenue from virtual worlds “the most compelling” among assets,
time” is a form of artificial intelligence compounding 17% annually and hitting noting it could scale from roughly $500
that is turbocharging the industry. Firm $390 billion by 2025. In-game purchas- billion now to between $1 trillion and $5
research sees deep learning adding $30 es could grow from $130 billion in 2020 trillion in 10 years. More firms are buying
trillion to the global equity market capi- to nearly $350 billion by 2025. it; insurance giant MassMutual invested
talization during the next 15 to 20 years. $100 million into Bitcoin in 2020.
“We believe that state-of-the-art AI 4 Digital Wallets
training model costs are likely to increase Venmo, Cash App and others could 7 Electric Vehicles
100-fold from roughly $1 million today to become the new bank branches — and About 10% of the Ark Innovation ETF is
more than $100 million by 2025”. upend banking models. By 2025, a con- invested in Tesla, so it’s no surprise the firm
sumer’s digital wallet could grow from a sees EV sales increasing 20-fold, from 2.2
2 Reinventing Data Centers base of about $1,900 today to $20,000. million in 2020 to 40 million units in 2025.
ARM, RISC-V and graphics processing The number of digital wallet users in the The firm also sees EV prices coming down
units (GPU) likely will become the new U.S. already surpasses the number of and reaching parity with gas-powered cars by
powerhouse processors and together deposit account holders at the largest 2023. Further, while EV sales were up 33% in
could scale at a 45% annual rate to financial institutions. 2020, sales of gas-powered cars fell 15%.
$19 billion in revenue by 2030. In data
centers, these GPUs likely will become 5 Bitcoin’s Fundamentals 8 Automation
dominant processors for new workloads The cryptocurrency has hit all-time Ark predicts that the growing use of auto-
and experience yearly demand growth highs, with firms like Tesla and Square mation could add 5%, or $1.2 trillion, to
of 21%, putting the market at $41 billion investing in it. This shows that Bitcoin U.S. GDP in the next five years. With the
by 2030. is playing a role as corporate cash, the move to more automation, Ark anticipates
firm says. Ark notes that if all S&P 500 higher wages for workers, lower prices for
3 Virtual Worlds companies were to allocate 1% of their consumers, higher margins for companies
Computer-simulated environments, such cash to Bitcoin, its price could increase and higher levels of investment — creating
as video games, can be accessed by any- by $40,000. virtuous cycles.

32 INVESTMENT ADVISOR APRIL 2021 | ThinkAdvisor.com