ARK Investment Management finally introduces their newest ETF. Here’s what you need to know.
Over the past months, there has been a lot of excitement stirring up around an emerging space exploration ETF. ARK Invest finally launched its ARK Space Exploration & Innovation ETF (ARKX: CBOE) and it began officially trading on March 30th. This Space Exploration & Innovation ETF is also the newest exchange-traded fund that Cathie Wood has introduced in two years.
ARK Invest stated that 80% of its assets will be invested in companies that engage in the theme of Space Exploration and Innovation. Although ARKX is not the first ETF to offer exposure to space companies, it does provide investors with ARK’s high-convictions names.
Why a Space ETF?
Cathie Wood emphasizes two important growth opportunities in the space industry: mobile connectivity and hypersonic flight. Advancing mobile connectivity helps people around the globe get access to broadband and hypersonic flight significantly reduces the length of travel.
“We believe the space industry is primed for takeoff”
For ARK Invest, space is an evolving theme. Due to innovations and advancements in mobile connectivity, 3D printing, and robotics, manufacturing costs are starting to decline. Therefore, the amount of rocket and satellite launches are increasing rapidly. In fact, ARK Invest believes that revenue from both satellite connectivity and hypersonic flight could exceed $370 billion annually.
How much will it cost you to invest in ARKX?
The expense ratio for ARKX is 0.75%. For example, for every $1,000 you invest, you would have to pay $7.50. This isn’t surprising since most of ARK’s ETFs have an expense ratio around 0.60% to 0.70%.
What are you actually investing in? Let’s break this down.
In January, ARK Invest explained the categories that would be included in the space ETF.
- Orbital Aerospace Companies: companies that launch, make, service, or operate platforms in the orbital space, including satellites and launch vehicles.
- Suborbital Space Companies: companies that launch, make, service, or operate platforms in the suborbital space, but do not reach a velocity needed to remain in orbit around a planet.
- Enabling Technology Companies: companies that develop technologies used by Space Exploration related companies for successful value-add aerospace operations. These operations include artificial intelligence, robotics, 3D printing, materials and energy storage.
- Aerospace Beneficiary Companies: companies whose operations stand to benefit from aerospace activities, including agriculture, internet access, global positioning system (GPS), construction, imaging, drones, air taxis and electric aviation vehicles.
Let’s take a look at some of the top holdings in this space portfolio.
- Trimble Inc (NASDAQ: $TRMB) – Trimble is a leading provider of advanced location-based solutions that maximize productivity and enhance profitability. Over 40 years, Trimble has filed over 2,000 worldwide patents for advanced technologies in transforming industries, such as agriculture, construction, geospatial and transportation. 40% of Trimble’s revenue comes from civil engineering as well as commercial and industrial building. 25% of Trimble’s revenue comes from transportation-related services, such as long-haul trucking. 20% of its revenue comes from its geospatial category which includes Survey Solutions, GNSS Infrastructure, GIS Data Collection, Correction Services, and Mobile Computing. 15% of Trimble’s revenue comes from other industries, such as Agriculture, Forestry, and Utilities. Trimble has seen increasing revenues over the past 5 years, except in 2020 in which there was 4% decrease due part supply shortages, adverse effects of COVID-19, foreign exchange fluctuations, and unfavorable geopolitical developments. What does Trimble have to do with space? There is no exact answer yet, but it may have to do with Trimble’s survey solutions, such as 3D lasers which can be utilized to survey space, and GPS satellites.
- The 3D Printing ETF (NYSEMKT: $PRNT) – It’s quite interesting how Cathie Wood decided to include an ETF with an ETF. The PRNT EFT is composed of a plethora of disrupting 3D printing companies, such as ExOne, HP, Renishaw, Straumann, etc. One of the reasons why this 3D printing ETF may be included in ARKX is because there are some space projects that utilize 3D rocket engine parts. Tom Teasley, a test engineer at NASA’s Marshall Space Flight Center in Huntsville, Alabama states that “3D printed technology is a game-changer when it comes to reducing total hardware manufacturing time and cost.”
- Kratos Defense & Security Solutions (NASDAQ: $KTOS) – Kratos is a defense company that operates as a contractor for the government. Kratos has extensive experience in constructing space systems, such as TurnKey Ground Systems, Spectrum Monitoring, Satellite Command & Control, and Spectrum Regulation. In fact, Kratos received a $37.7 Million Skyborg Program Contract Award from USAF Advanced Aircraft Office to “integrate, test, and deliver XQ-58A Valkyrie aircraft.”
- L3 Harris Technologies Inc (NYSE: $LHX): L3 Harris is one of the largest defense contractors that addresses defense challenges and creates innovative solutions for defense, space, and commercial sectors. L3 Harris produces tactical communication systems, night vision equipment, spaceborne antennas, surveillance systems, and many more products regarding space exploration. In February of 2021, L3 Harris Tech was awarded $89 million for a second option year U.S. Space Force and U.S. Space Command contract known as the The Maintenance Of Space Situational Awareness Integrated Capabilities (MOSSAIC) program. The purpose of this program is to “continue maintaining and modernizing infrastructure to track objects in space.”
Not all companies in ARKX are pure-space play…
There are a variety of holdings in this portfolio that are not directly space-related, such as Netflix, John Deere, JD.com, and Alibaba. For instance, why would a company like Netflix be included in a space ETF? Although Netflix has over 200 million subscribers, there are still over 40 million people in the U.S. alone who do not have access to a broadband connection. If there is a satellite solution that is developed then more customers will have access to broadband which can potentially expand Netflix’s addressable market.
Alphabet Inc. and Nvidia are also indirectly related to space. Alphabet is currently a leader in artificial intelligence which can help further space exploration and NVIDIA’s GPUs are utilized to stimulate rocket engines.
If Virgin Galactic is a pure space play, then why isn’t it given more weight? According to Cathie Wood, Virgin Galactic is primarily focused on space tourism rather than the two large growth opportunities, such as mobile connectivity and hypersonic flight. Although Virgin Galactic does plan on getting into hypersonic flight, it would need to be “added to its long-term business plan” in order for it to be given more weight.
Amazon is a no brainer in this space portfolio. Amazon’s Project Kuiper aims to launch more 3,000 satellites into orbit to help expand broadband services as well as internet access to households all around the globe.
While many of the holdings in ARKX may seem peculiar to the average investor, those companies are still related to the space industry one way or another. This portfolio is not entirely a pure space play. However, we may see many of these companies become more involved in the space industry as they evolve in the future. Investors who are really interested in the Space Exploration theme probably expected more exposure to companies like Virgin Galactic, Maxar Technologies, and Loral Space & Communications.
It is difficult to predict how this ETF will do in the next 6 to 12 months, but Wood does expect this portfolio to have a compound annual rate of return of 20% for the next 5 years which is similar to other ARK ETFs.
What makes ARK Invest ETFs attractive to investors is that they focus on an investment approach that is based on emerging industry disruptors and next-generation innovators. Although ARK’s ETFs are currently underperforming the market, it is important to acknowledge that ARK is focusing on a long-term growth strategy. With that being said, ARK Invest is not focusing on short-term volatility. They are utilizing these current volatile market conditions to consolidate into their highest conviction names. Space travel and exploration are industries that are going to undergo immense growth in the next 10 to 15 years.
“Space is already an invisible backbone to our economy and we think that’s only going to become more so.” – Sam Korus, ARK Analyst
Investors may not get the exposure they expected in this space ETF, but this is a start. There is a possibility of Wood giving more weight to companies that are completely dedicated to space travel and exploration.