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A look at the Canadian version of ARK’s innovation fund

The pandemic has brought home the many ways technological innovation can help us, from the software behind Zoom meetings to the logistics behind next day delivery of goods and services.

Many of these things may become less important once vaccinations send us back to the office and the mall, but the changes are part of larger disruptive trends.

There are many funds for investors that capture these trends. But one in the spotlight is Ark Investment Management LLC in New York, mainly because its founder and CEO Cathie Wood is an outspoken technology evangelist with contrarian points of view.

Ark’s flagship disruptive innovation fund was seeded with US $15 million in 2014 and today it is a goliath.

Ark Innovation founder Cathie Wood grabs headlines with her contrarian views on tech stocks. Credit: Supplied photo

The exchange traded fund (ETF) (NYSEarca: ARKK) has US $23.5 billion in assets and lays claim to the largest actively managed ETF on any global exchange. In 2020, it ranked first among 604 funds with over $1 billion in assets, according to independent analyst Morningstar Research. It returned 152.5 per cent return.

This year, after hitting a peak of US $159.70 a share in mid-February, it has retreated by 23 per cent giving up all of its 2021 gains.

In Canada, ARK manages five active ETFs as a sub-advisor for Emerge Canada Inc. The flagship is marketed as the Emerge ARK Global Disruptive Innovation ETF (NE: EARK). Canadian versions of U.S. funds make more sense for Canadians because of the tax treatment which I discussed in a recent post. 

Here’s a closer look:

Background: Emerge ARK Global Disruptive Innovation ETF (NE: EARK) was launched in June 2019 and is the Canadian version of the Ark Innovation ETF.  The fund is sub-advised and actively managed by Cathie Wood and her ARK team. It is hedged to the Canadian dollar and has $207 million in assets.

The fund invests in a global basket of companies that are focused on disruptive innovation. This includes technologically enabled new products or services that could potentially change the way the world works.

Performance:  The fund’s total return in 2020 was 130.8%, according to Morningstar Research.  Year-to-date, it is down  1.9%. It  ranks 92th of 1,698 similar funds.

Holdings: The fund is broadly diversified by sector, but geographically holds most of its holdings in the U.S. (79%).  Canada’s Shopify in 8th spot counts as a U.S. holding. Another 11% are in Asia and 9% in Europe.

Healthcare and communications services are the largest weightings at 29% each. Information technology is 8%, consumer discretionary 11%, financials 9% and industrials 3%.

The top 10 holdings account for almost half of the assets. None of the top 10 holdings pay a cash dividend, though one has issued a stock dividend.  The top five holdings are Tesla (10%), e-payment firm Square Inc. (6%), entertainment streaming company Roku Inc. (5.5%), telehealth provider Teledoc Health Inc. (5%) and Chinese multinational Baidu Inc. (4%).  

Key metrics:  The fund typically holds between 35-50 stocks and has a relatively high expense ratio of 0.80%,

Discussion: The fund offers a way to take part in a number of converging themes and is balanced by sector and company size. For example, ‘mega cap’ stocks make up 26% of the holdings. They include Tesla and Square with market capitalizations of US $650 billion and US $111 billion respectively.  These are well established businesses.

Another 36% are ‘large cap’ stocks, such as Roku ($45 billion) and Teladoc ($30 billion). Those groups together make up almost two-thirds of the fund. That adds another layer of safety. The higher risk micro caps, typically between $35 and $50 million make up 13% of the holdings.

This structure reduces risk while offering a way to invest in these growing technologies. As always, deciding whether it is suitable for you is something to discuss with an advisor.

This is an edited version of article that appeared in the Internet Wealth Builder on March 15, 2021. For information on how to reprint this article please view this page.

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