ARK ETF in a Dividend Portfolio

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.

I mean just look at the capital-light business model of Shopify or Facebook.

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.

Disclaimer
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.

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4 comments

  1. Great article as always SavyFox ! 👌😃📖 Indeed ARK ETF is very popular, but some investors find the MER of 0,75% expensive. I choose instead QQQ ETF with a MER of 0,20% with awesome tech stocks too. I added MSFT + FB to my portfolio too as individual stocks. Wish I had more saving to invest in those. After all for a investor who wants high performance of growth stocks ARK ETF is definitely a amazing product of investment! 📈✨💲

    • Hi Divdendes & FNB
      Definitively I very good choice, the QQQ ETF has a more favorable cost/pricing and very strong focus on the Big Tech names as well such as Apple, Microsoft, Amazon, Alphabet, Tesla, NVIDIA, Paypal, Adobe. What I like about ARK ETFs is that they use their expertise to take a relatively strong exposure in tech businesses that would not necessarily be on my radar such as Teladoc Health Inc., Twilio Inc., Coinbase Global, Spotify Technology or Unity Software. But I have to say that I like the QQQ ETF very much, which reflects many positions in the SavyFox stock portfolio.
      Microsoft and Facebook are both fantastic businesses and I’d like to have larger positions in them as well. But I am pretty confident that both of us will have the opportunity to increase our shareholdings in such wonderful companies over time.
      Thanks for stopping by, appreciate your comments.
      Cheers

  2. I bought into ARKK at the very top haha. Not fun to see it fall 30% in less than two weeks, but for a lot of the reasons you list here, I feel good about it long term. They can chase the growth stocks for me that I don’t have time to discover. Though I wish my cost per share was lower!

    • Hi IF
      Thanks for stopping by and commenting.
      Yes, I know exactly what you mean, not fun to see book losses after a buy. But as you write, the long term prospects for ARKK are very strong. They invest in amazing companies, and like you, I don’t have the time and expertise to analyse all these businesses.
      Cheers

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