This article was originally published on ETFTrends.com.
Investors can capture growth through the quick advancements in technological developments. In an attempt to hone in on the potential opportunities, one should consider the criteria used to identity a disruptive innovation and look to an exchange traded fund strategy that adapts to the changes.
On the recent webcast (available On Demand for CE Credit), How Investors Can Identify Disruptive Innovation and What it Can Add to a Portfolio, Catherine Wood, Chief Investment Officer and CEO of ARK Invest, explained three broad criteria to isolate a disruptive innovation platform. Disruptive innovations should enable rapid cost declines and economic tipping points, cut across sectors and geographies, and spawn further innovation.
For example, robotics help enable rapid cost declines and economic tipping points.
"We believe many investors don’t do the work to understand these unit-economic thresholds and misunderstand the potential scope of a transformative technology," Wood said.
Deep learning or artificial intelligence is seen as a type of transformative innovation that cuts across sectors and geographies. Woods explained that relative to the Internet, Deep Learning could impact more sectors, causing more profound disruptive innovation across different industries.
"Spanning across sectors also provides the opportunity for better product-market fits and insulates the innovation against business cycle risk," Wood said.
Additionally, autonomous technology may be seen as an example of innovation that could spawn further innovation.
"Innovation spawning platforms are typically underestimated over expansive time horizons because successful forecasts require that an analyst anticipate the scope of new products and services that they will spawn," Wood added.
ARK's Focus on Disruptive Innovation
As a way to tap into these disruptive technologies, ARK focuses on disruptive innovation in an effort to take advantage of four market inefficiencies, including the market's short-term time horizon, the passive public markets, the silo-ization of Wall Street and the closed-off research and investment mentality, Tom Staudt, Chief Operating Officer for ARK Invest, explained.
The market can be distracted by short-term price moves, potentially losing focus on the long-term effect of disruptive technologies. In an attempt to address this market inefficiency, ARK can try to take advantage of this arbitrage opportunity, targeting companies that offer growth over 3-5 years that the market is ignoring or underestimating, according to Staudt.
Innovation investors tend to be crowded into the private markets while at the public markets have increasingly gone passive as witnessed in the rapid growth of index-based fund strategies. Consequently, Staudt argued that innovative public companies with forward looking growth are the most inefficiently priced part of the market.
Staudt also warned that innovation cannot be boxed into sectors, geographies, or market caps, which leaves indexing strategies missing out on forward looking growth opportunities, while analysts covering disruptive companies have trouble understanding technology cost curves. To address this inefficiency ARK’s analysts are organized by cross-sector disruptive innovation themes to capitalize on the convergence of research.
Lastly, Staudt contended that disruptive innovation requires an open-source approach for a deeper understanding of the convergence and full market potential. Consequently, ARK uses an Open Research Ecosystem that combines top-down and bottom-up research to identify disruptive innovation early, allowing for an organized exchange of insights between the portfolio manager, director of research, analysts, and external sources.
As a way to access disruptive innovations through a targeted fund strategy, ARK Invest offers a suite of actively managed ETFs focused specifically on the three main innovative segments, including the ARK Industrial Innovation ETF (ARKQ) , ARK Web x.0 ETF (ARKW) , ARK Genomic Revolution Multi-Sector Fund (ARKG) and the broader ARK Innovation Fund (ARKK) .
ARKQ captures the converging industrial and technology sectors, capitalizing from autonomous vehicles, robotics, 3D printing, and energy storage technologies.
The ARK Web x.0 ETF targets next-gen internet innovations like artificial intelligence, cloud computing, cryptocurrencies, and blockchain technology.
The ARK Genomic Revolution Multi-Sector ETF tracks the convergence of tech and health care.
The ARK Innovation ETF is a catch-all for or a broader theme based on the investments across all of the firm’s three innovation themes.
Staudt explained that the disruptive innovation strategies may provide enhanced portfolio diversification since thematic investing in disruptive innovation can offer a low correlation of relative returns to traditional growth strategies and negative correlation to value strategies. The component holdings are not focused any single area of the market as a top-down approach looks at secular trends and ecosystems to find attractive growth opportunities across sectors. In addition, a constant focus on secular changes and disruptive innovation can generate a portfolio hedge in a rapidly changing world and complement traditional strategies.
Financial advisors who are interested in learning more about disruptive technologies can watch the webcast here on demand.
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