ARK launches actively managed space ETF

Mar 30th, 2021 | By | Category: Equities

ARK Investment Management has launched the world’s first actively managed ETF targeting companies linked to the space industry.

ARK Space ETF Cathie Wood

The fund is the first actively managed ETF to target companies linked to the space industry.

The ARK Space Exploration & Innovation ETF (ARKX US) has listed on Cboe BZX Exchange and comes with an expense ratio of 0.75%.

Commenting on the theme, Cathie Wood, CEO and CIO of ARK Investment Management, said: “We believe the space industry is primed for take-off. Thanks to advancements in deep learning, mobile connectivity, sensors, 3D printing, and robotics, costs that have been ballooning for decades are beginning to decline.

“As a result, the number of satellite launches and rocket landings is proliferating. We believe that the orbital aerospace revenue opportunity alone – including satellite connectivity and hypersonic flight – will exceed $370 billion annually.”

ARK has made a name for itself as a specialist provider of disruptive technology investment strategies with performance numbers to boot.

Its flagship fund, the $17.7 billion ARK Innovation ETF (ARKK US), which invests across multiple disruptive-technology-related themes, gained 152.5% during 2020.

Spacious mandate

The ARK Space Exploration & Innovation ETF will typically hold between 40 and 55 companies aligned with the space exploration theme, which ARK defines as leading, enabling, or benefitting from technologically enabled products and services that occur beyond the surface of the Earth.

Based on this definition, ARK classifies space-related companies into four categories: orbital aerospace, suborbital aerospace, enabling technologies, and aerospace beneficiaries.

The fund has a relatively free-range mandate with permission to invest in companies of any market capitalization size encompassing both developed and emerging market listings, and a fairly accommodative definition of space exploration and innovation.

The fund’s prospectus notes that ARK will combine top-down information (growth rates, cost declines, unit economics, sizing of markets, price levels, and technology cycle trends) with bottom-up criteria (fundamental and quantitative metrics such as companies’ revenue growth, profitability, and return on invested capital) when selecting constituents for the portfolio.

ESG analysis will be considered but it will not be a driving force in security selection.

Tangential exposure

The fund’s prospectus notes that “many of the companies the fund invests in may only have an indirect and not a substantial involvement in the space industry”, and the portfolio’s current allocation shows it to have only marginal pure-play exposure to the space exploration theme.

Indeed, of the four categories, aerospace beneficiaries accounts for the largest exposure with a weight of 39.7%, as of 26 March. According to ARK, this category, which encompasses firms whose operations stand to benefit from aerospace activities, includes companies operating in the internet access, GPS, construction, imaging, drones, air taxis, and electric aviation industries. Even agriculture companies, which utilize satellite imagery for weather forecasts, are eligible for selection.

The orbital aerospace category provides a purer-play on the space exploration theme, including firms that launch, make, service or operate platforms in orbital space, including satellites and launch vehicles. This category currently commands a weight of 28.6%.

Companies that develop aerospace-enabling technologies also account for a sizable position, currently making up a quarter (24.9%) of the fund’s holdings. Again, these firms may not be considered directly linked to the space exploration theme but rather cover a broad range of other disruptive technology themes including artificial intelligence, robotics, 3D printing, materials, and energy storage.

The suborbital aerospace category, which includes firms that launch, make, service, or operate platforms in the suborbital space, currently accounts for a weight of just 5.6%.

Stocks listed in North America currently account for nearly two-thirds (73.2%) of the fund’s weight with Asia Pacific (13.9%) and Western Europe (10.2%) making up the majority of the remaining geographic allocation. Half (47.0%) of the fund is allocated to the industrials sector with notable weights also assigned to information technology (21.5%) and consumer discretionary (13.4%) stocks.

Top holdings in the ETF include Trimble (8.6%), ARK’s The 3D Printing ETF (6.0%), Kratos Defense & Security (6.0%), L3Harris Technologies (5.1%), (4.9%), and Komatsu (4.7%).

Space race adversaries

The fund will compete against two passively managed ETFs.

The Procure Space ETF (UFO US), launched in April 2019, tracks the S-Network Space Index which selects developed market companies with business operations linked to satellite-based consumer products and services, rocket and satellite manufacturing, space technology hardware, and space-based imagery and intelligence services. The fund has $130 million in assets and also comes with an expense ratio of 0.75%.

The SPDR Kensho Final Frontiers ETF (ROKT US), meanwhile, launched in October 2018 and provides exposure to firms driving the commercialization of space travel and deep-sea exploration by tracking the S&P Kensho Final Frontiers Index. The fund houses $25m and costs 0.45%.

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