Date: 03/23/2021
Author: Mr. X
The pandemic hasn’t really been “good” for anyone. Let’s just say that among those who have coped best during this period is Cathie Wood.
About 13 million people began trading stocks for the first time over the course of the COVID-19 pandemic. You may be one of them. If you are, you’ve probably heard of Cathie Wood, CEO and founder of ARK Investment. You’ve definitely heard of Tesla [TSLA], one of the most “disruptive” companies in the marketplace today and a breakout stock over the last year.
By almost every conventional standard, Tesla is overvalued compared to current revenue. Yet those who shorted Tesla lost an estimated $40 billion in 2020. Elon Musk became (and may still be, depending on when you are reading this) the world’s richest man. Wood was able to capitalize on that success by heavily investing in TSLA and other disruptive companies. From the end of 2019 to the end of 2020, ARK grew from $3.1 billion to $34.5 billion. The ARK Innovation ETF, which had Tesla as its biggest holding, gained 743 percent.
It wasn’t just one ETF. Out of the six ETFs Ark had last year, five posted returns over 100 percent. Today, Tuesday, March 30, the Ark Space Exploration & Innovation ETF [ARKX] will begin trading. Naturally, this is where Wall Street’s attention will be.
However, there are questions about whether ARK has peaked. The ARK Innovation ETF [ARKK] is down over 18 percent over the last month, and almost 14 percent over the last three months.
A recent filing also shows that Ark is doubling-down on its model of concentrating on specific stocks. It recently changed rules that imposed two limits – first, how much of a fund’s assets could be put toward a single company, and second, how great a percentage of a company’s shares that Ark could own.
Cathie Wood is also raising eyebrows with her comments on Bitcoin. She claims the current one-trillion dollar valuation of the cryptocurrency is “nothing compared to where this will ultimately be.” At a time when other experts are warning that the federal government could be looking to crack down, this is a bold prediction.
Of course, I share her viewpoint on Bitcoin. Yet I acknowledge the risk. Investors should thus go in with their eyes open if they decide to invest in ARKX on its first trading day. As they say, past results are no guarantee of future performance. According to research recently posted at Morningstar, most funds lose money in the years after posting a triple-digit gain. There’s a real danger that on day one of this ETF, it’s already too late.
It may be holding time that is determinative for most potential investors in this ETF. In the short term, it’s difficult to believe that both institutional investors and beginning retail traders won’t pour into it. We could see an opening day surge similar to what we saw with Roblox [RBLX] on day one. Yet RBLX has already begun giving back some of its initial gains now that the excitement has faded.
Long term, the ETF is investing in what will be the most important economic field in the future. While we are mired in the pandemic, we overlook the fact that commercial space launches have become banal, almost not even newsworthy. While we’re worried about “vaccine passports” to go to the airport, we will see civilians making space flights in this decade. Defense, 3-D printing (including of rockets), mining equipment, and even fields such as e-commerce will be changed by what will be happening in outer space.
At the same time, while few would dispute that extraterrestrial capitalism has a bright future, there’s a contradiction at the heart of it. Governments are increasingly concerned about controlling supply chains, militarizing outer space, and cutting competitors out of areas of strategic interest. The list of companies ARKX will be investing in includes companies from the United States and China. Yet these countries seem to be decoupling from each other’s economies, especially when it comes to areas that could prove important to national security. Companies like Taiwan Semiconductor Manufacturing [TSM], one of ARKX’s holdings, will also be at the mercy of geopolitical events.
ARKX seems to be counting on energetic competition and even tension when it comes to militarization and national defense. However, it also seems to assume globalization will continue. In truth, this is the most likely scenario, with China and America posturing but neither side taking a fatal step towards a horrifying military confrontation. Still, that last possibility isn’t unthinkable. One can think of countless scenarios in which a naval conflict in the Pacific could escalate and there will be even more dangers in orbit.
ARKX is really a bet on the future. In the short term, I think it is a strong choice for investors. In the long term, it seems reasonable to get in on the growth market of the future now. However, with Chinese-American competition growing and seemingly immune to the change in Administration in Washington, the next three to five years seems dangerous.
If I were looking at ARKX, I’d either be seeking to be in and out fast or to hold for many years. Investors might also benefit from simply investing in the main holdings ARKX has selected, notably Trimble Inc [TRMB] and Kratos Defense & Security [KTOS].
The next few years will be extremely perilous for the geopolitical system. A new order will emerge, but it will be messy until it does. The world is being forced to take sides between China and America. Small nations and large companies who try to take a middle-of-the-road approach may end up being run over.
I might simply be too pessimistic about the prospects for continuing globalization. Just because humanity has made it to space doesn’t mean that the geopolitical battles will end here on earth. And if there’s one rule of history, it’s that most political elites will choose power for themselves rather than prosperity for their peoples.
