ETF Expert Corner

Cathie Wood Highlights ARK ETFs, Discusses Disruptive Technologies

August 1st, 2017 by ETF Store Staff

Cathie Wood, Founder & CEO of ARK Invest, spotlights the ARK Innovation ETF (ARKK) and the ARK Web x.0 ETF (ARKW), two of the top performing non-leveraged ETFs so far in 2017.  Cathie also explains the rationale for owning disruptive technologies/companies in a portfolio and offers her perspective on Bitcoin, Amazon, and Tesla.



Transcript

You can listen to our interview with Cathie Wood by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: We are now very pleased to have joining us on the program Cathie Wood, Founder & CEO of ARK Invest. As I mentioned earlier, ARK Invest is an up-and-coming ETF provider. They currently offer five ETFs. Those ETFs are approaching $300 million in assets, and their niche is offering ETFs focused on disruptive innovation - so think game-changing technologies - products and services that are fundamentally altering a particular industry. We're going to spotlight two of these ETFs on the program today. Cathie is joining us via phone from New York. Cathie, great having you back on the program.

Cathie Wood: Thank you, Nate. Very happy to be here.

Nate Geraci: Cathie, first of all, congratulations on the success you're seeing with the ARK ETFs, both in terms of asset growth, as well as performance. I was actually looking back when we had you on the program last August, I believe assets were somewhere in the neighborhood of $50 million, so you've experienced tremendous growth. I'm curious, what has the last year been like, both for you and ARK Invest?

Cathie Wood: Well, it's been proof of concept, really. We had, during the first three-ish years of our existence, four risk-off periods, which disadvantaged our strategy. But the irony is, during risk-off periods, disruptive innovation gains more traction and the fundamentals supporting our companies actually get better. So that's part of the performance that we've seen this year, is just, truth wins out.

Nate Geraci: I want to focus in on two ETFs in particular today: the ARK Innovation ETF, ticker symbol ARKK, and the ARK Web X.0 ETF, ticker symbol ARKW. Both of these are up close to 50% year-to-date and these are two of the top performing non-leveraged ETFs. Let's start with the Innovation ETF. This is your most popular ETF by assets. Describe for us what this ETF is seeking to do.

Cathie Wood: This ETF combines all of our strategies. It combines the next generation internet, industrial innovation, and genomic revolution strategies, which are also separate ETFs - focusing on general purpose technology platforms that are changing the way the world is going to work and really make it a better place. They're technologically enabled, and they're characterized by declining cost curves, very rapid unit growth, productivity growth, and real wealth creation at the end of the day.

Nate Geraci: Cathie, how many holdings are in this ETF?

Cathie Wood: In the overall Innovation ETF there are roughly 50 names, typically between 40 and 55. Right now we're at 50 names.

Nate Geraci: And this is actively managed, correct?

Cathie Wood: Yes. We trade pretty much every day.

Nate Geraci: Can you tell me a little bit about that process of active management? When you're talking about companies involved with disruptive innovation, disruptive technologies, just high-level, talk a little bit about your process for filtering through the companies that are out there.

Cathie Wood: Well, what's interesting about the way we filter through companies is, we don't screen any index, which is how a lot of ETF providers would describe what they do. We are doing a lot of original research that is focused on sizing the opportunities associated with the genomic revolution, or robotics and automation, or next generation internet featuring artificial intelligence or blockchain technology. So we're sizing how big those opportunities are going to be and where the unit economics, where the real value is going to be in those themes. As we do that, we find companies. They come to us as we're doing our original research.

Nate Geraci: The other ETF I want to touch on is the ARK Web X.0 ETF. This is your next generation internet ETF. For people unfamiliar with this space, first, what does that mean: next generation internet? And then can you explain for us how this ETF is constructed?

Cathie Wood: Sure. The next generation internet is really focused, very importantly, on artificial intelligence, subsets of which are deep learning and machine learning, and you've heard about internet of things. It's really how the world is going to become increasingly connected and how companies must adapt to the new world, using information they have in-house to become more competitive and to develop better relationships with their customers, better relationships with their suppliers and so forth. So it's really game-changing. It's a land rush right now or a gold rush in terms of artificial intelligence, and the picks and shovels are companies like Nvidia, which is the artificial intelligence chip company.

Nate Geraci: Our guest today is Cathie Wood, Founder & CEO of ARK Invest. Cathie, the second largest holding in the Web X.0 ETF is actually the Bitcoin Investment Trust, and this also happens to be one of the holdings in the Innovation ETF as well. Let's spend a few minutes on Bitcoin and blockchain technology. Of course, Bitcoin has received a lot of attention this year. The price of Bitcoin has nearly quadrupled over the past 12 months. First, how would you explain Bitcoin in layman's terms for people who may be unfamiliar with how this works? Then second, what's the investment thesis here? Because there's been a lot of debate over whether Bitcoin is similar to the tulip mania back in the 1600s, or that it's something that will fundamentally change how we transact. What's your take?

Cathie Wood: Well, clearly, because it's one of the top positions in our portfolio, we believe the latter. We are very happy though that there's a lot of skepticism. I always feel more comfortable when we're scaling a wall of worry. Those are the strongest bull markets, and we do think Bitcoin and blockchain are in bull markets. To give you a sense of how early on we are, the entire ecosystem of crypto assets, including Bitcoin, is about $90 billion to $100 billion in, effectively, market cap. Apple is $800 billion. So this is at its infancy. If we are right, and it is going to change the way we transact and transfer value fundamentally, it is going to be an enormous theme. We think that people do not appreciate how big it will be. Today it's particularly important, because the controversy has come to a head, the controversy around what's called forking of the Bitcoin. There are two camps. One camp says, "We are never going to change the code." And another camp says, "We must evolve this code so we can get faster, cheaper, better." So the fork happened this morning at 8:00am. The Bitcoin price is down $166 to $2,720, but it's holding very, very well because the other side of the fork is worth around $300. So together, they're $3,000. I know this is a lot to absorb, but it is such an important day and many people are watching it who are watching our portfolios; are watching it, so I wanted to explain that.

Nate Geraci: Cathie, sort of on that note, I know there's also currently a lot of competition in the digital currency space: Ethereum, Ripple, Litecoin, Dash, there's been an onslaught of "initial coin offerings". I actually read that there are now more than 800 crypto currencies out there. How do you see this competition playing out and is that a concern at all for Bitcoin?

Cathie Wood: Actually, what's been interesting about this period of time, Bitcoin has gone from roughly 80% of the crypto asset market cap - it got as low as, I think, 30% when that flood of crypto currencies and other crypto assets started coming out - and now it's back up to 50%. We think a lot of those crypto assets are probably not going to exist in a few years’ time. They're hugely speculative. Some will survive, but we think this has battle-tested the Bitcoin blockchain and the Bitcoin community, and we actually think it's going to be stronger for it.

Nate Geraci: Just taking a step back here, just to make sure all of our listeners understand Bitcoin, and I can tell you, as we talk to investors, we get a lot of questions on this. There's a lot of confusion around Bitcoin and blockchain technology. Without going too far into the weeds, how do you describe what Bitcoin is to the layman?

Cathie Wood: We can describe it using a few use cases, much better than going into the underlying technology or plumbing. One of them is store of value. Store of value is the role that gold plays, has played traditionally. Bitcoin wants to do the same thing. It has limited the number of Bitcoins that will be issued to 21 million units. We're at 16.5 right now, 16.5 million units, so the guarantee of purchasing power is something inherent in the Bitcoin ecosystem. That's one use case. A second use case in terms of transfer of value, is the remittance market. The remittance market is serviced today by companies like Western Union, but they take a huge chunk out of the value that's being transferred in exchange for their service. They take about 7%, 8% at the minimum, and in some countries, services like Western Union take up to 25%. Bitcoin is going to be like money over IP. It is money over IP. There was a time when we could not imagine voice over IP being free, or voice being free. Voice over IP today is free. Likewise, we think at some point money being transferred will be transferred for free. Right now, there are exchanges that you have to pay at either end from fiat into Bitcoin and back again, but we think that whole ecosystem is going to be incredibly cheap at the end of the day; almost free.

Nate Geraci: Before we move on here, any thoughts on whether we'll see a Bitcoin or digital currency ETF?

Cathie Wood: I think that the reason the SEC has not gone there yet is the liquidity has not been there. There's also this controversy that we think we're resolving today with this fork and seeing how it impacts the Bitcoin price. I think they've been in a wait-and-see from both a liquidity point of view and from a software development point of view, and both are improving. So yes, we think at some point there will be a Bitcoin ETF. I wouldn't be surprised to see a Bitcoin closed-end fund first. The open-end nature of an ETF could challenge liquidity in these early days, as I mentioned. The entire ecosystem of crypto assets is about $90 billion, and Bitcoin is roughly half of that, so $45 billion. That's not even a very big stock, so we have a little way to go before we see real liquidity for an ETF to capitalize on.

Nate Geraci: We're visiting with Cathie Wood, Founder & CEO of ARK Invest. Cathie, two of the other top holdings in both ARKK and ARKW are Amazon and Tesla. Both comprise one of the top five or six holdings in these ETFs, and Amazon is actually the top holding in ARKW. I just want to briefly touch on both of these. Let's start with Amazon. I've got to tell you, just last week I actually ordered a new laptop bag from Amazon and I never cease being amazed at the level of service. The bag I bought was a couple hundred dollars cheaper than what any brick and mortar retailer is offering it for, it showed up to my house within a day, day and a half, perfect condition. Can anybody compete with Amazon?

Cathie Wood: I think because Jeff Bezos, from day one, has said, "We are going to invest aggressively to capitalize on this massive opportunity." While other companies were actually listening to shareholders, I'm sorry to say, a bit too much, in terms of returning shareholder capital and financial engineering, Jeff was saying, "No, we are going to invest aggressively and we're going to grab the lion's share of this market." And that's exactly what they're doing. Online is about 10% of retail. Some people say you have to take food out of that equation, well, they just bought Whole Foods, so we don't agree with that, so 10%. From our experience, any trend that hits 10% to 20% market share is entering the sweet spot of the S-curve. That's what we think Amazon's doing, and that is why it is capturing 40% to 50% of all the incremental online sales out there. As a shareholder, I am delighted that Amazon is delighting you, because that is how they're going to win this game.

Nate Geraci: What about the robotics and artificial intelligence side of Amazon? You know, the cheap prices and fast delivery, those get all the headlines, but can you speak at all to what's going on behind the curtains as it relates to robotics and AI?

Cathie Wood: Sure. They bought Kiva in 2012, a robotics company, depriving all other retailers of those robots, by the way, and they stole the march in terms of automating their warehouses. They have gone from 1,000 robots in their distribution centers at the beginning of 2014, to 80,000 now, and yet, their employment since that time has nearly tripled. Now, I'm not saying it's tripled in the distribution centers, it's tripled overall, partly because of Amazon Web Services, but largely because of the retail side of the business because they're gaining so much share, and because their sales growth has re-accelerated.

Nate Geraci: Again, our guest today is Cathie Wood, Founder & CEO of ARK Invest. Lastly here, Cathie, I want to touch on Tesla. I recently listened to a fascinating podcast with Barry Ritholtz and VC investor Marc Andreessen. Marc basically said, "Look, the winning car company of the future is the one that makes the best software, not the one who makes the best cars or hardware." He said, "The entire experience of being in the car will be defined by software." That really hit home to me. I think most people think of a car as a machine, but Marc Andreessen made the analogy, "Would you rather be like Nokia and just manufacture phones, or be in the software and experience business like Apple?" I thought that was really interesting. Tell us about Tesla.

Cathie Wood: Yes, Marc has hit it on the head. We couldn't agree more. We also would take that maybe a little step further. We think that Tesla is leading the charge into the autonomous taxi network space, so we believe that that world is going to be characterized by natural geographic monopolies. In the US, it might be Tesla and Google, perhaps Apple, they've lost some talent, but they're trying to rebuild in the auto space there. In Japan, it might be Toyota. In China, it'll be the Didi consortium. So we think that Tesla's leading the charge in the United States, and we were really interested that Tencent, one of the sharpest technology companies in China, took a 5% position in Tesla, because we believe that it believes, its management believes, that Tesla is doing this the right way: software, services, and once again, I'll go back to something you said earlier about Amazon, absolutely delighting the consumer. And the consumer rules. What the consumer wants, the consumer gets.

Conor Kelly: Cathie, this is Conor Kelly. Quick follow-up question: what chance do you give the traditional US car manufacturers, Ford, GM, et cetera, to succeed in this software-based car world?

Cathie Wood: That's a great question. One reason we think it's going to be very difficult for them to succeed is, while they have lots of engineers, they're not the right kinds of engineers. They don't have the software engineers they need. Maybe a more important structural problem though is their dealer network. Tesla is going to delight consumers with over-the-air software updates. Those are going to improve the car's performance. Well, in many states, by law, the OEMs are not allowed to do that, and in the other states, because they're dealers, they do not own their dealers and don't want to alienate them, they're going to have to figure out a way to bring them into this line of thinking. It's going to be very difficult because the dealers get more than all of their profits from services. What Tesla hopes to do is really minimize the number of visits a customer has to make to its repair site. In fact, they're going to send vans out to homes instead of having customers come in. That is not the way the OEM dealer network is set up. It's set up so that you and I have to take half a day, sometimes a day off. Tesla doesn't want that to happen. It's going to be really difficult for OEMs to overcome that structural impediment.

Nate Geraci: Cathie, we have about a minute left here - before we let you go - I think when most investors think of disruptive innovation and disruptive technologies, they think the reason to invest is simply the potential for higher rates of growth. To close here, is it that simple? Is that the rationale to own ETFs such as ARKK and ARKW?

Cathie Wood: So, sure, our themes are characterized by rapid, if not exponential growth, but I think another important reason to own our ETFs, especially if you're using the more commoditized ETFs which mimic the very large indices, is we know there are a lot of value traps in those indices, and in fact, even more as our themes evolve, and our ETFs are going to be ahead against those value traps in the traditional indices.

Nate Geraci: Well, Cathie, as always, a pleasure having you on the program, just tremendous perspective. We certainly wish you continued success with the ARK ETFs. Thank you for joining us today.

Cathie Wood: Thank you so much for this opportunity. Thanks, Nate.

Nate Geraci: That was Cathie Wood, Founder & CEO of ARK Invest and you can learn more about their ETF lineup by visiting ARK-Funds.com, that's ARK-Funds.com.