203: The Capacity For Innovation

This season of “The Switch” is focused on the mechanics of ETFs. In this episode, host Ren Leggi, Client Portfolio Manager for ARK Invest, and ETF Trends’a CEO Tom Lydon and CIO Dave Nadig discuss the capacity for innovation, in a market environment that offers so much investment potential.

With assets under management well over $50 billion, ARK has grown significantly in recent years, powered by a signature active management strategy that invests in a select few groups of high conviction stocks. However, Lydon wondered if there’s concern for a possible lack of investible companies in the future. However, Leggi assuaged those thoughts quickly, explaining that the universe of innovative stocks still has so much to offer.

The entire market cap related to the five innovation platforms ARK invests in can be sized to around $15 trillion, said Leggi. These platforms include Blockchain/Fintech, DNA Sequencing, Energy Storage, A.I., and Robotics.

“We think they’re going to create roughly $75 trillion worth of business value and wealth creation over the next ten years,” said Leggi. “When you think about that universe, it’s much larger than what everyone is anticipating.”

By comparison, the global equity market cap is currently approaching $100 trillion. Thus, from ARK’s perspective, they have the ability to invest anywhere geographically, or in any sector/industry, or in any market cap. With so many innovative stocks out there, catching all the winners would be only a fraction of the total investible marketplace.

Capitalizing On Innovation

Nadig asks about capitalization requirements for innovative companies. Private companies can choose to go public more quickly today than before, via SPAC vehicles; the opportunity has proven to be very attractive to management companies. They can now go public without the distraction of the IPO process, while doing so at multi-billion dollar valuations.

But as Leggi states, ARK goes where innovation takes them. If there’s a lot of opportunity in the SPAC space, that could influence the portfolio. However, it’s not much of an issue when looking at companies looking to go public at valuations of $3-4 billion. Then, it really depends on the technology in what can help one lean in certain directions.

“The beauty for our main strategy is that we cut across all of those main areas, and the average market cap of the entire portfolio is in the mid- to large-cap space,” Leggi adds.

As Leggi explains, MSCI has launched a suite of innovation-focused indices, with its main index holding over 500 names. The total global market cap of that index is just shy of $50 trillion–similar to ARK’s forecasts for the total universe of innovative companies they look at. That’s a great sign, in that the two methodologies come at the same question from different angles and reach similar results.

“It is something we put out there,” Leggi points out. “Some investors want to gain a more passive exposure to innovation, and that’s fine. We think just having any exposure to innovation is crucial because of where these technologies are going and how disruptive they are to some of these backward-looking indices like the S&P 500.”

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