Dive into ARKX (ARK Space Exploration ETF)

There is a new kid on the block.

ARK Invest has just launched its latest ETF, ARKX, on Tuesday (30th March). It opens with a price of 20.89 USD and has a closing price of 20.91 USD as of Thursday (2nd April).

Much has been hyped about this ETF, given the success of all the other ARK ETFs over the past few years. Many think that it's an opportunity to buy themselves a golden ticket to phenomenal growths in their portfolio in the next few years or decades, especially for those who claimed they "missed the boat" with the other ARK ETFs.

Let's take a dive into this ETF and find out more if it's an ETF worth investing.

While most people have the impression that a space exploration ETF is going to heavily focus on cool and interesting trends like space colonisation or even asteroid mining, the reality is a bit different with ARKX. Instead of purely focusing on these trends, ARKX focuses on the whole space ecosystem and consists of companies which can be directly or indirectly benefited from the growth of space exploration as a mega trend.

Broadly, ARKX can be divided into four categories. Firstly, orbital aerospace companies

which focus on launching, making, servicing or operation platforms such as satellites and launch vehicles in the orbital space. Secondly, suborbital aerospace companies which pretty much focus on the same things as the first category with the exception that the space they focus on is the suborbital space instead. Examples of which will be drones and air taxis. Thirdly, technology companies which create technologies that value-add aerospace operations. And lastly, aerospace beneficiary companies which get to generally benefit from aerospace activities. As you can see, the third and fourth category are a lot more general than the first and second category. There is a whole array of companies which can potentially fall into the third and fourth category. If a company is dealing with artificial intelligence, robotics, or even internet access, there is some likelihood that the company might fall into either of these two categories. This is also where some investors are confused about the companies which fall under this ETF- which will be something I will explain later on.

Now, let's look at the top 10 constituents of this ETF.

(Source: https://etfs.ark-funds.com/hubfs/1_Download_Files_ETF_Website/Fact_Sheets/ARKX_Factsheet.pdf)

At the first sight, you might be thinking why is JD in this ETF, even occupying the fifth position in this ETF. In fact, many investors have the same thoughts too. When you dive into the extended list, you will even see companies such as Netflix, Amazon and Alibaba in the list. What is the linkage between Netflix and Space? Surely, the fact that Netflix has tons of space movies like Space Force and The Martian doesn't make it a space company right?

This is where most investors are left baffled.

Remember I mentioned earlier that ARKX has four categories, and the third and fourth category is a lot more general than the first two?

Here is a breakdown of the weightings of these four categories.

(Source: https://etfs.ark-funds.com/hubfs/1_Download_Files_ETF_Website/Fact_Sheets/ARKX_Factsheet.pdf)

You can see clearly that the first two categories which are very space-oriented only consist of 34.2% of the ETF. The third and fourth category makes up the rest of the ETF. This is also where companies such as Netflix, JD, Amazon and Alibaba probably belong to. These companies are likely either producing technology to enable space exploration or going to be indirectly benefited by this mega trend. For example, advancement of space technology is probably going to result in constellations of satellites which will result in deeper penetration of internet services in certain parts of the world. As much as Netflix has a strong customer base in the developed regions of the world, it's never going to achieve any big form of success in places where internet services are missing. If there is a deeper penetration of internet services in these areas, you can be sure that Netflix will be an indirect beneficiary of this mega trend and I suspect that's also why it's included in ARKX.

In the near future, I expect that an increase in the weightings towards the first two categories as the ETF becomes increasingly focused on companies which are directly benefiting from the growth of the space industry.

Another reason for ARKX to have the internet companies as part of their ETF could be due to the fact that these ETFs generally do not hold much cash as they are not designed to do so. Hence, a good alternative to cash might be these internet companies which can possibly be more stable holdings as compared to other space-related companies. Since the space industry is in an infancy stage, you don't have too many of such space-related companies right now. When the space industry begins to pick up in the near future, the fund manager can always liquidate their holdings in these internet companies and invest into the other space-related companies.

Having said all of these, is ARKX a good ETF to be included in your portfolio?

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