ARKK ETF: Looking beyond the day-to-day volatility and headlines

What is disruptive innovation?

Before we explore the nature of disruptive innovations and technologies, we need a general understanding of what it is. ARK’s management team defines disruptive innovation as “the introduction of a technologically enabled new product or service that potentially changes the way the world work.” If you were to examine the ETF holdings, they are exactly that. The portfolio includes companies that work on gene editing, automation, artificial intelligence, and fintech innovation. 

The nature of disruptive innovations

The scope and influence of disruptive innovation has far-reaching implications for humanity. Think about the smartphone you may be reading this on. When IBM launched the world’s first smartphone 28 years ago, its sales numbers were abysmal, and the product was riddled with a myriad number of complications pertaining to its battery life and inefficiency. Fast forward to today, it is estimated that 6.64 billion people own a smartphone – about 83% of the world’s population. In a developed country like the United States, that number increases to an astounding 97 percent. This is not to suggest the holdings of the ARKK ETF will reach the same level of success the smartphone has had, but it is to emphasize that new inventions take time, lots of it. In fact, according to a study, it takes anywhere from 2 to 4 decades for a new invention to be fully commercialized on a wide scale. This is further corroborated when looking at the electric vehicle (EV) industry – for all its success, we are still decades away from when EVs will make up the largest percentage of new sales. Investors of ARKK need to be considerate that industries that are still in their infancy stage of development will take time to get through regulatory apparatuses and regulations in order to have their products and services fully commercialized.

Outlook for ARKK and final takeaway 

ARKK is a risky investment. Its own management team concedes this in their statement while highlighting the need for a long-term strategic approach: “ARK recognizes that disruptive innovation causes rapid cost declines, cuts across sectors, and spawns further innovation. […] ARK aims to identify innovation early, capitalize on the opportunities, and provide long-term value to investors.”  While no one can predict with certainty where ARKK will go from today, investors should tread carefully and always do their own research when allocating their hard-earned capital to work, especially in an environment where interest rates are rising, on top of the previous externalities mentioned in this article. However, if shareholders of ARKK can stomach the day-to-day volatility of the market and patiently wait for years to come, human ingenuity just might reward them. 

ARKK ETF – (Ark Innovation ETF)

• AUM: $9.7 B 
• Expense Ratio: 0.75%
• YTD performance: -47.17

Data as of August 17, 2022.

References:

https://ark-funds.com/funds/arkk/

https://www.sciencedirect.com/science/article/pii/S0301421518305901

https://www.weforum.org/agenda/2018/03/remembering-first-smartphone-simon-ibm/

https://www.nytimes.com/interactive/2021/03/10/climate/electric-vehicle-fleet-turnover.html