What’s driving the outperformance behind ARK’s next generation fund?

The ARK Next Generation Internet ETF [ARKW] has had a stellar performance so far in 2020, with disruptive tech stocks leading the digital transformation amid the coronavirus pandemic. The fund was up 141.4% year-to-date at $139.07 on 4 December – could it continue to rally to the year end?

The ARKW ETF started the year at $58.04 on 2 January, rising to $71.97 on 19 February before plunging to $42.71 on 18 March as fears over the impact of COVID-19 on the economy and society sent markets plunging.

However, as people and businesses throughout the globe increasingly turned to technology to ease the challenges of lockdown it surged to a high of $115.45 on 1 September.

The fund dipped again to $99.25 on 8 September, as tech stocks corrected and fears over a second wave of the virus grew. However, the ETF has since recovered strongly to hit $113 on 10 November and $139.14 on 4 December.

Its year-to-date total daily return, according toYahoo Finance, was 136.5% on 4 December and it had total net assets of $2.8bn. The fund is much larger compared to the $6.2m in net assets in the BlackRock Future Tech ETF [BETK]. Its other peer, the Global X Robotics & Artificial Intelligence ETF [BOTZ], had net assets of $1.8bn and a year-to-date total return of 47.2%.

Disrupting the market

The ARK Next Generation Internet ETF, launched on 30 September 2014, is an actively managed ETF investing at least 80% in domestic and US exchange-traded companies relevant to its theme of next generation internet. This covers sectors such as cloud computing, cyber security, e-commerce, big data and artificial intelligence (AI), mobile technology and internet of things.

It typically has between 35 and 50 holdings. At the start of December, the fund’s biggest holding was electric vehicle maker Tesla [TSLA] at 9.8% followed by streaming TV platform Roku [ROKU] at 7.6%, mobile payment group Square [SQ] at 5.1%, streaming service Spotify [SPOT] at 3.6% and virtual healthcare provider Teladoc Health [TDOC] at 3.3%.

Other holdings include Pure Storage [PSTG], Grayscale Bitcoin Trust [GBTC], Facebook [FB] and Pinterest [PINS].

Tesla had led the high returns in the fund, with its shares rocketing from $84.90 on 2 January to $599.04 on 4 December following surging demand for its electric vehicles. The stock is expected to continue booming as governments around the globe look to renewables to repower post-pandemic economies.

Roku’s share price growth had accelerated from $135.99 on 2 January to $296.38 on 4 December. The stock has been boosted by increased connected TV demand, as people find ways to stay entertained during lockdowns.

Square’s shares, meanwhile, have climbed from $62.99 on 2 January to $208.15 on 4 December driven by demand for its Cash App after online sales zoomed higher amid the pandemic. Teladoc Health’s share price has also surged driven by the need for more online consultations.

The ARK Next Generation Internet ETF has benefited from having diverse holdings in a sector which has flourished as consumers and businesses respond to the coronavirus pandemic.

Reshaping the economy

“The global pandemic has sparked tremendous advance in innovation,” Alexander Poulos wrote in Seeking Alpha. “The disruption to everyday life has forced us to embrace change far more rapidly which speeds up the adaption curve of new technological advances.”

He was particularly upbeat about Square, describing it as “a disruption on steroids as it continues to pivot into adjacent fields in finance”, and Bitcoin.

Todd Shriber, chief ETF analyst at Benzinga,was also bullish about Roku and Spotify. “The internet itself is disruptive but ARKW’s roster is more levered to true disruptors than competing strategies and its streaming entertainment exposure is just one example of that trend,” he wrote in InvestorPlace.

There are potential hurdles, however, such as those concerns over Tesla’s valuation — even founder Elon Musk had warned that its shares could get “crushed” — as well as a potential drop off in demand for digital offerings in a post-pandemic world.

But the arc of the ARK Next generation Internet ETF looks likely to continue rising high as more innovative companies join the queue to try and reshape and recharge the economy.

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