Space. There’s a lot of it. How in the world does one go about investing in the final frontier? No surprise – there’s an exchange-traded fund, or ETF, for that. But what exactly does one invest in?
Leave it to the ARK Space Exploration & Innovation ETF (BATS:ARKX) to figure that out for you. ARKX is an actively managed ETF that primarily invests in domestic and foreign equity securities of companies engaged in space exploration and innovation. The fund’s objective is long-term capital growth. It currently has net assets worth $246 million with an expense ratio of 0.75%. The fund’s portfolio comprises 35-55 holdings with a weighted average market cap of $119 billion. Space, it would appear, is an investment theme that requires large-cap exposure.
Understanding ARKX’s Investment Theme
The fund’s investment theme, Space Exploration, is defined as technologically enabled products or services that occur beyond the Earth’s surface. This includes the following key areas:
Orbital Aerospace Companies: These are firms that launch, make, service, or operate platforms in orbital space, including satellites and launch vehicles.
Suborbital Aerospace Companies: These are firms that launch, make, service, or operate platforms in suborbital space, but do not reach a velocity needed to remain in orbit around a planet.
Enabling Technologies Companies: These are 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: These are firms whose operations stand to benefit from aerospace activities, including agriculture, internet access, global positioning systems (GPS), construction, imaging, drones, air taxis, and electric aviation vehicles.
ARKX’s Top Holdings
Top holdings in ARKX included:
Kratos Defense & Security Solutions Inc (KTOS) is known for its cutting-edge unmanned aerial systems (UAS) and target drones used for threat representation and weapon system evaluation by the U.S. military and its allies.
Trimble Inc (TRMB) is a global company specializing in advanced location-based solutions. These solutions combine positioning (like GPS) with wireless communications and software to create tools for various industries, including agriculture, construction, transportation, and telecommunications.
AeroVironment Inc (AVAV) is a leading technology company specializing in the design, development, production, and support of unmanned aircraft systems and electric transportation solutions.
Iridium Communications Inc (IRDM) provides voice and data communication services through its constellation of low-Earth orbiting satellites.
UiPath Inc (PATH) is a leading robotic process automation company that offers an end-to-end platform for automation, combining the leading Robotic Process Automation solution with a full suite of capabilities to enable every organization to rapidly scale digital business operations.
Sector Composition and Weightings
ARKX’s sector breakdown is mainly concentrated in the Industrials (53.8%) and Information Technology (26.8%) sectors, followed by Communication Services (9.2%) and Consumer Discretionary (5.0%).
Peer Comparison
ARKX can be compared to the Procure Space ETF (UFO). Both target the burgeoning space industry but differ in their investment approach and focus, providing investors with distinct options in space-related investments. ARKX focuses on space exploration and innovation, incorporating a wide array of companies involved in orbital and suborbital aerospace, advanced materials, and technologies that support space exploration, such as AI and robotics.
On the other hand, UFO, managed by ProcureAM and tracking the S-Network Space Index, offers a more targeted focus on companies with material involvement in space-related industries, including satellite technology and space infrastructure, requiring that constituents derive a significant portion of their revenue directly from space-related activities. UFO’s methodology provides a more focused exposure to the space industry, potentially appealing to investors seeking a more traditional sector-specific approach. Both ETFs offer unique entry points into space industry investments, reflecting different strategies and risk profiles.
When we look at the price ratio of ARKX relative to UFO, it’s been the clear relative momentum winner.
Pros and Cons of Investing in ARKX
Pros
Exposure to Innovation: ARKX offers exposure to disruptive innovation across the space exploration arena. This includes companies involved in orbital and suborbital aerospace, enabling technologies, and beneficiaries of aerospace activities.
Growth Potential: The fund aims to capture long-term growth with low correlation to traditional growth strategies, making it a potentially lucrative addition to a diversified portfolio.
Active Management: The fund is actively managed, allowing it to rapidly seize emerging space investment opportunities and adjust its holdings in response to market changes.
Cons
Sector Risk: The fund’s heavy concentration in the Industrials and Information Technology sectors exposes it to sector-specific risks such as changes in government regulations, economic conditions, and industry consolidation.
Expense Ratio: With an expense ratio of 0.75%, ARKX is relatively more expensive than other ETFs in the sector. This could potentially eat into the returns for long-term investors.
Volatility: Given the emerging and fast-paced nature of the space exploration sector, the fund could be subject to considerable volatility due to technological changes, regulatory shifts, or market dynamics.
Conclusion: To Invest or Not to Invest
Investing in ARK Space Exploration & Innovation ETF provides an exciting opportunity to tap into the potential of space exploration and associated technologies. However, the elevated expense ratio and inherent volatility of the sector may render it less appealing for long-term investors who are particularly cost-conscious. The fund could be more suited for momentum-driven investors who are banking on short-term trends or the specific investment strategies that ARK employs. Good fund for a big long-term opportunity if management can stock pick right.
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