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June 30, 2021 | Commentary
During the second quarter, broad-based global equity indexes – as measured by the S&P 500 and MSCI World – continued to appreciate as many economies began to reopen in response to successful vaccination rollouts. On Capitol Hill, the Biden Administration continued negotiations on what could become a bipartisan infrastructure bill and another source of economic stimulus. Meanwhile, in ARK’s view, the odds of significant capital gains and income tax increases in the US have declined thanks to an agreement signed by the vast majority of 130 countries that, if ratified in October, would impose a 15% minimum tax rate on large global corporations. Now that midterm election campaigns are in early stages, narrow majorities in both Houses of Congress also could lower the probability of onerous tax measures that appear to be unpopular. The US yield curve flattened slightly as the 10-year Treasury bond yield fell to 1.47%, well below the 1.74% peak posted at the end of March. In other words, the bond market does not seem to be corroborating the fears of inflation that have dominated headlines recently.
In ARK’s view, inflation will prove temporary thanks both to the base effects caused by price collapses during the coronavirus crisis last year and to supply chain bottlenecks that could be causing double- and triple-ordering of supplies which, in turn, could lead to a significant inventory overhang and a commodity price collapse. With the exception of oil, cracks in the commodity markets already are apparent. From their peaks in the second quarter, lumber prices have dropped more than 57% from $1,686 to $716 per thousand board feet while copper prices have dropped roughly 13% from $4.78 per pound to $4.16. Oil prices probably will not be far behind despite shareholder demands for cutbacks in energy-related capital spending. If drivers in the ride-sharing space migrate to electric vehicles and take advantage of the lower total cost of ownership relative to gas-powered vehicles, any decline in oil prices could be exacerbated.
In ARK’s view, exacerbating the cyclical deflation will be two secular sources of deflation, one good for economic activity and another deleterious. Innovation is the source of good deflation, as learning curves cut costs and increase productivity. Instead of investing to capitalize on the exponential opportunities associated with the 14 technologies evolving today, however, many companies have catered to short-term oriented shareholders who have demanded results “now”, leveraging their balance sheets to buy back stock, bolster earnings, and increase dividends. As a result, facing the disintermediation and disruption associated with aging products and services, they could be forced to cut prices to clear inventories and service bloated debts, resulting in deflation with a deleterious impact on economic activity.
If ARK is correct that the risk to the outlook is deflation, not inflation, then nominal GDP growth is likely to be much lower than expected, suggesting that scarce double-digit growth opportunities will be rewarded accordingly. Growth stocks in general and innovation-driven stocks in particular could be the prime beneficiaries.
During the second half of the quarter, value gave way to growth in performance. Through mid-May, as commodity prices soared, the rotation from growth/innovation toward value/cyclical strategies gained momentum. ARK believes that this rotation has broadened and strengthened the bull market, preventing another tech and telecom bubble and likely setting the stage for another leg up in innovation-based strategies. In late May and June, after the reset in growth valuations and the drop in commodity prices like lumber and copper, investors began to return to growth/ innovation at the expense of value/cyclical strategies. In ARK’s view, the coronavirus crisis transformed the world significantly and permanently, suggesting that many innovation-driven stocks could be productive holdings during the next five to ten years. Among the largest beneficiaries of the rotation toward cyclicals during the past six to nine months have been two sectors that ARK believes will be disrupted the most by innovation during the next five years: Energy and Financial Services. In ARK’s view, autonomous electric vehicles and digital wallets, including cryptocurrencies and decentralized financial services (DeFi) associated more broadly with blockchain technologies, will disrupt and disintermediate both Energy and Financial Services significantly during the next five years.
ARK’s five actively managed thematically focused ETFs and two self-indexed ETFs appreciated but underperformed relative to the S&P 500 and MSCI World Indexes during the second quarter. That said, the ARK Innovation ETF (ARKK), a concentrated portfolio of high conviction names with exposure to all of the ARK’s disruptive innovation themes, outperformed the broad-based global indexes.
To read a summary of ARK’s biggest contributors and detractors, please see below.
The ARK Autonomous Technology and Robotics ETF (ARKQ) underperformed the broad-based market indexes during the quarter. Among the top detractors were Workhorse Group (WKHS) and Virgin Galactic Holdings (SPCE). WKHS suffered as Capitol Hill failed to clarify its position on the conversion of the US Postal Services’ fleet to electric vehicles. SPCE depreciated not only in response to intensified competition from Blue Origin and SpaceX but also to lower than expected earnings and revenue as well as flight schedule delays and Founder Richard Branson’s decision to sell shares. ARK exited both WKHS and SPCE, capitalizing on the market’s downside volatility by rotating into higher conviction names.
Among the top contributors were 3D Systems (DDD) and Alphabet (GOOG). DDD appreciated in response to better than expected revenues and earnings in the first quarter. In addition, 3D Systems announced a partnership with CollPlant Biotechnologies to 3D bioprint regenerative soft tissue for breast reconstructions. GOOG appreciated in response to e-commerce tailwinds and a significant rebound in ad revenue. Alphabet also announced several product and service initiatives, including a Pixel 5A 5G phone and the expansion of Google Workspace, as well as several contracts for GCP, its cloud platform.
The ARK Next Generation Internet ETF (ARKW) underperformed the broad-based market indexes during the quarter. Among the top detractors were Grayscale Bitcoin Trust (GBTC) and Coinbase Global (COIN). GBTC responded to a 45%+ drop in the price of bitcoin, precipitated in part, we believe, by Elon Musk’s second thoughts about the heavy use of energy in bitcoin mining. ARK believes that bitcoin mining, when incorporated into solar+battery utility ecosystems, could accelerate the proliferation of renewables faster than otherwise would be the case. COIN also suffered from the drop in bitcoin and other cryptoassets. Founded in 2012 and now one of the leading crypto exchanges in the world, Coinbase has attracted 56+ million users in part thanks to its onramps and its commitment to government regulations.
Among the top contributors were Roku (ROKU) and Trade Desk (TTD). ROKU rallied in response to strong revenues and earnings, notably platform ad revenue and gross profits. Roku has increased its commitment to original content and has sustained user gains generated during the coronavirus crisis. In a volatile quarter, TTD appreciated after Alphabet announced a delay in its plan to block third-party cookies from Google Chrome. Trade Desk is an ad-tech company that facilitates audience targeting across media formats.
The ARK Genomic Revolution ETF (ARKG) underperformed the broad-based market indexes during the quarter. Among the top detractors were Teladoc Health (TDOC) and Iovance Biotherapeutics (IOVA). TDOC depreciated as several companies including Amazon announced competitive incursions into the digital health space. ARK believes Teladoc can process and analyze data unlike any competitors, explaining why it has become a leader in telehealth and a single touchpoint for an extensive set of services. Historically in the US, healthcare data has been highly fragmented, an impediment that Teladoc appears to be overcoming. Thanks to its recent acquisition of Livongo, Teledoc has strengthened its data and analytical capabilities. IOVA declined after the company disclosed a six-month delay in its Biologics License Application (BLA), a commercialization application submitted to the U.S. Food and Drug Administration (FDA), in response to feedback on its potency assays. Additionally, Iovance disclosed that Maria Fardis, CEO for the last five years, would be leaving to pursue other opportunities. Frederick Vogt, General Counsel, has stepped in as interim CEO. ARK believes that tumor infiltrating lymphocytes (TILs) are the most compelling therapies for solid tumors and that Iovance has the most robust TIL data set.
Among the top contributors were Intellia Therapeutics (NTLA) and CareDx (CDNA). Intellia Therapeutics made history by presenting the first data of a CRISPR Cas9 in vivo gene editing therapy in patients with Hereditary Transthyretin Amyloidosis (hATTR). Until now, patients with hATTR faced limited treatment options. Intellia’s data highlighted that editing the TTR gene could result in a one-time treatment, eliminating the need for chronic therapy, signifying that one-time cures are possible. CDNA responded positively to CareDx’s acquisition of Transplant Hero, a mobile application provider focused on the needs of transplant patients. CareDx is modernizing transplant medicine with deep genomics expertise, machine learning, and longitudinal patient management.
The ARK Fintech Innovation ETF (ARKF) underperformed the broad-based market indexes during the quarter. Among the top detractors were Silvergate Capital (SI) and Coinbase Global (COIN). Silvergate Capital shares traded down, primarily in response to a sharp drop in the prices of bitcoin and other cryptocurrencies. COIN detracted from performance for reasons discussed above.
Among the top contributors were Shopify (SHOP) and Sea (SE). SHOP appreciated in response to the continued shift to e-commerce, expanded partnerships with Facebook and Google that will increase Shop Pay’s access to merchants, and the strategic acquisition of an augmented reality platform, Primer. Sea’s self-developed global hit game, Free Fire, continued to impress, while its e-commerce platform, Shopee, grew average daily orders significantly.
The ARK Space Exploration & Innovation ETF (ARKX) underperformed the broad-based market indexes during the quarter. Among the top detractors were Komatsu (6301-JP) and Virgin Galactic Holdings (SPCE). Komatsu suffered from a broader selloff in construction and mining stocks. ARK believes that Komatsu will leverage its position as a top construction and mining equipment supplier and become a leader in autonomous equipment. SPCE detracted from performance for reasons discussed above.
Among the top contributors were Nvidia (NVDA) and Raven Industries (RAVN). NVDA appreciated in response to stronger than expected first quarter earnings and guidance, a higher probability that it will succeed in acquiring ARM, sell-side upgrades, and a strong move in semiconductor stocks generally. During Investor Day, Nvidia also unveiled the Omniverse Platform, its Grace CPU, and an AI LaunchPad. In June, CNH announced an agreement to acquire Raven for a significant premium. Raven Industries makes precision agriculture and high altitude balloons, while CNH is the second largest agricultural equipment maker globally.
With some of the highest conviction names from the Funds discussed above, the ARK Innovation ETF (ARKK) outperformed the broad-based indexes during the quarter. Among the top contributors were ROKU and NTLA, for reasons discussed above. Detracting from performance were TDOC and COIN, for reasons discussed above.
ARK’s self-indexed ETFs, The 3D Printing ETF (PRNT) and the ARK Israel Innovation Technology ETF (IZRL), appreciated during the quarter. PRNT underperformed relative to the broad-based market indexes. ExOne (XONE) was the largest detractor after a broadbased selloff in the 3D printing space. ExOne is a leader in binder jetting 3D printing, an area on which its 3D printing peers like HP and Desktop Metal are focusing increasingly. DDD was the top contributor for reasons discussed above.
IZRL underperformed relative to the broad-based market indexes. Evogene (EVGN) was the largest detractor from performance as biotech sold off broadly. The company is engaged in research and development to improving crop quality, productivity, and economics in the food, feed, and biofuel industries. InMode (INMD) was the top contributor, as Barclays released a favorable report on the medical device industry, including a positive outlook for InMode.
ARK Innovation ETF
ARK Genomic Revolution ETF
The 3D Printing ETF
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