The leader in disruptive company stock holdings
Cathie Wood, founder and CEO of investment firm ARK Investment Management LLC (Ark Invest) has built an amazingly interesting group of actively managed exchange-traded funds (ETFs), focusing solely on disruptive innovations, giving “investors the opportunity to participate in long-term growth in the public markets with low correlation to traditional investment strategies“.
These ETFs focus on businesses that are highly innovative and fully tech-driven. You won’t find The Coca-Cola Company or PepsiCo in these ETFs, which are prime holdings for many Dividend Growth Investors due to their shareholder-friendly dividend policy which has been underpinned by an amazingly strong market position for over 120 years.
As said, ARK ETFs are different. For example, you can find in their positions high flying and disruptive growth giants like Tesla, Roku, Square, Teladoc, Facebook, and Tencent, etc. The performance of ARK ETFs speaks volumes. For instance, USD 10’000 invested in Next Generation Internet ETF (ARKG) back in 2015 would now have a market value of well above USD 80’000 which is really remarkable.
ARK Invest is the only super large money manager that has such a strong and clear focus. And they are perfectly right to continue doing so. It is not just amid the COVID-19 pandemic that it has become obvious to the whole world, that digitalization is a secular trend compared with the Industrial Revolution a few centuries ago. Tech behemoths like Amazon, Microsoft, Cloudflare, Alphabet, etc. will be the long-term winners.
Growth stocks belong in any portfolio
While focusing only on disruptive tech players inherently poses some risks. For instance, some of them have not yet reached break-even and are under the constant threat of being disrupted themselves.
But still, it makes perfect sense for any investor to have some exposure to tech businesses such as NVIDIA, Adobe, Square, Facebook, Shopify, etc. As a group, they will grow literally unstoppable for decades to come, but of course, not all will be successful.
I am a big fan of owning stakes in rock-solid businesses such as Nestlé, L’Oreal, Hershey and Mc Donalds, etc. There are plenty of companies that are so strong that they won’t get disrupted. But I also like combining a Dividend Growth Investor approach with shareholdings in strong Tech Businesses. It makes also perfect sense with view to future strong dividend payers.
Or Amazon, growing amazingly fast in its highly scalable, capital-light segments. People often think of its Online Stores, Third-Party Seller Services, its cloud revenues via Amazon Web Services (AWS), Subscription Services, and Physical Stores. But there is much more. Amazon’s Advertising Business for instance can be found in the segment “others”, accounting for roughly 5 % of the group’s total revenue mix. But what an understatement to put it in that category (“others”): the advertising business has been growing over 40 % each year, which is crazy. I mean Amazon is already the undisputed E-Commerce leader plus the number one in cloud services (Amazon Web Services; AWS). But there are several businesses under the Amazon umbrella that will turn into giant profit contributors. And in a few years from now, Free Cash Flows will skyrocket. In my view, it is very likely to see the following trajectory: First, there will be share repurchase programs at Amazon, such as Alphabet and Facebook already have. And then, not more than ten years from now, there will be considerations with regards to making shareholder distributions. As you have seen in the case of Apple, Microsoft, and NVIDIA. For many such a trajectory is unthinkable, but just take Microsoft for instance, which has for decades not paid out any dividends despite its huge profitability and amazingly dominant market position.
Getting into tech via an ETF
I like Warren Buffet’s mantra that it’s vital to invest only within the circle’s own competence. I mean he has mastered that focus on strong moat businesses such as Coca-Cola, Visa, etc. brilliantly for decades.
But things have changed. Tech giants, as a group are the defensive plays. In fact, I see a combined stake in Amazon, Facebook, Alphabet, Apple, Microsoft, and NVIDIA as equally defensive as having taken a stake in Nestlé, PepsiCo, Mc Donalds, Estee Lauder, Colgate… forty years ago. Chances are good that it will be – at least – equally rewarding over the long term going with the tech giants.
The beauty about ETFs such as the ones of ARK is that one does not have to be a tech expert. It’s a very convenient hands-off approach of putting some money to work.
Your circle of competence consists of acknowledging that there is a massive digitalization trend with huge opportunities for the tech giants and the knowledge about the existence of ETFs. Investing in them is like taking a stake in multiple businesses.
Besides the prospect of potentially nice book gains over the long term, there is also the aspect of dividends. All ARK ETFs make distributions to their fund holders annually. As said, several tech giants such as Apple, Microsoft, and NVIDIA, etc. already pay out dividends and are prone to increase their payouts over time. And the best is yet tome come as overtime, more and more tech businesses will start making shareholder distributions, making a position in an ARK ETF also a nice passive income source.
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.