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so if you've been following disruptive technology stocks at all you've probably heard of arc invest it's run by kathy wood and it's a unique investment management company that has a series of actively managed etf funds they have five active funds and two passive funds the big news is that across these five active etfs arc is actually up an average of 136 this year alone absolutely eye-watering returns and that's just an average their genomics fund which is their top performers actually up 175 year to date as i record this if you just bought these funds a year ago you'd basically be a lottery winner right now so the question is how are they doing this when most active fund managers can't even manage to beat the broad market and how can you and i get a piece of the action so i've dug into their business and their investing strategy i'd like to tell you how they've achieved these kinds of returns and i'd like to present both a bull case and a bear case for actually investing in these etfs so in terms of structure in terms of the investment products they actually have like i said this family of five active funds that invest in different areas of disruptive technology and they have two passive funds that passively track an index of broad companies so the absolutely crazy returns are coming from these active funds whereas their two passive funds have more modest returns down around the 30 percent annualized number which is still incredibly good these guys are doing really really well across the board now those five funds are actively managed which is kind of rare amongst etfs they don't simply track a passive index at all kathy wood and her team are in there buying and selling every day they'll easily execute 20 different transactions a day sometimes a lot more than that and so there's a lot of high turnover in these funds as they constantly rebalance their holdings buy new companies sell underperformers there's a ton of active activity in here and what's really unusual about this fund is that they release their trades every single day and so you can easily follow what they're doing which has gained a ton of interest among the investment community as they watch exactly how these crazy profits are being made every day okay so let's look at the fun part which is their returns you can see a lot of these funds are up over a hundred percent some very close to it and even the five-year performance is really fantastic they're they're racking in numbers even over the long term that would make any investor really really happy to own these funds you know a lot of them were launched in 2014 except for the fintech fund which is a new addition to the family only launched in 2019 but these four funds here have a solid history behind them but really it's this last year's performance that is capturing all the attention right now i think people are becoming more and more aware of disruptive technology as a potential uh investment and as soon as you start looking into it you're absolutely going to discover arc invest and they've attracted a lot of investor inflows now if you really dig into that five year history of returns you will see that the bulk of the returns came in the last year or so if you roll the clock back and you look at early 2014 into about 2017 it wasn't all that great they sort of floundered along they did well enough but they didn't really start to take off until 2017 time frame so in between 2017 and 2019-ish they did quite well their performance was basically enhanced a lot by tesla kathy wood made a big bet on tesla in that time frame and it certainly paid off a good deal within those two to three years but then the meteoric rise absolutely starts this year uh just before the pandemic which i think interrupted that spike in their pricing and then immediately recovered afterwards and absolutely shot up to where it is today so i think had you invested in 2014 you would have had to have been patient to really capture the rise that only happened uh closer to present day so in order to really understand what arc is doing and how they're going about it you need to understand the traditional analysis and investment model that used to look for technological innovation instead of disruption so innovation happens when an existing company improves a service uh develops some some new tweak or some new improvement to something that was largely existing this tends to happen within a sector or within a given industry and rarely these innovations are big and significant but they're still typically confined to that industry they might shake up that industry or sector a little bit but they generally don't have an impact across the board the way that a disruptive technology does the very definition of a disruptive technology is that it happens across a broad base of sectors and it has the potential to interrupt or even destroy traditional business models across many sectors because of that broad-based potential the total addressable market share for a disruptive technology is not constrained by an individual sector and this is really the key thing is that kathy wood is looking for companies that have this broad base potential across sectors to disrupt a lot of existing business and capture a mountainous amount of market share she's looking for total addressable market numbers that are simply not achievable within a given sector based on this old traditional model of investment analysis now the problem with this idea is that disruptive technologies are subject to what's called the technology s-curve which means that in the beginning the technology will flounder along largely unrecognized the potential isn't really seen and companies that are trying to bring this stuff to light often fail it's a really really difficult business to be on that bleeding edge of any new technology there's a high failure rate and oftentimes the underlying ideas simply don't prove out and they get thrown in the garbage and people can lose a lot of money investing in these early stage companies but if companies can get out of that very early stage they tend to hit the exponential part of that s-curve and the the value that they can deliver and the profits that they can bring home are absolutely meteoric during that exponential rise part of the s-curve and then inevitably a technology will start to mature it will level off and the amount of growth that's capable of generating then is not as great so really the the key part of ark's investment strategy is to try to get in on that early stage as soon as something looks viable and then try to capture that large amount of return that's available in the sweet spot on that s-curve now of course the problem with this is that if you get in before the exponential point on the curve you have to select companies that as they say can cross the chasm and what this means is is the company able to execute on their idea can they bring the technology to the point where they can develop a viable business around it if they can't then that's it they're done and investors could lose all of the money that they put into these early stage companies but if they can actually make that leap across the chasm they have to get to that point where they're widely recognized as viable and at that point they can take off and everybody that's holding them is probably going to get very rich so how does eric do this how do they identify disruptive tech how do they find it how do they figure out if it's going to be capable of crossing that chasm and how do they make really really good bets to avoid the losses that you often would experience with these early adopters typical analysis models to identify innovation is done on a top-down basis and what this means is that you look at the broad opportunities in the sector and then you try to find companies that can take advantage of that so the first part of eric's investment process is somewhat similar to this and they do employ a top-down research approach at least in the beginning the difference though is that they are looking for disruptive innovations and they call this the ideation phase where they go out and look for these broad opportunities and then the next step is to size that opportunity in terms of trying to figure out what that total addressable market share is across the entire scope of that disruption that's possible that's the really really difficult part and this is where i think they draw a lot of criticism because they inevitably come up with these absolutely gigantic estimates for total addressable market and most people that are used to a traditional analysis model will laugh them out of the room at this point the next phase of their process is a bottom-up research the next phase of their process is a bottom-up approach where they take a number of candidates that they've identified both technologies and companies and they try to find the best ones that are at the right point in terms of an investment and this process is somewhat iterative where they continue to tweak it over time to make sure they're putting the right amount of money into the right opportunities so this ideation phase is based on broad-based research and this is the problem with identifying early disruptive companies is that you have to find them and it's not really easy sometimes sometimes you have to dig deep into the academic community sometimes you have to dig deep into early phase startups that don't look viable at all how do you find these unicorns and so the approach that arc tends to follow is they're trying to augment traditional research sources with online and social media sources and crowdsource to really get at these underlying opportunities by talking directly to people researchers entrepreneurs and folks that are involved in these really really early stage companies and try to learn about their ideas and their businesses before anybody else i think if you wanted to be critical of this approach you could say that they're using buzzwords here in terms of promoting their idea and their model but at the end of the day the results speak for themselves it does appear to be working for them so the other question is what companies are they actually buying what are they holding these etfs to generate these kinds of returns so they actually disclose all of their holdings and if you look at them you can easily see the companies that are in there what i've done here on this spreadsheet is that i have collated their top holdings across all of their funds there are some companies that appear in more than one fund tesla for example is the top holding in three of their funds and then there's some other companies that make heavily weighted appearances across the funds as well so i've collapsed them all into this list of top ten holdings by market value and the overall percentage that it makes up and so you can see what these companies are and you can see the area that they're in uh you know i think that the take home here is the diversification and this is what really struck me when i looked at the diversity of companies that they're actually holding and the different spaces that they're in um you know i think there's a lot of diversity to be had within each of these etfs and certainly if you were to allocate some funds across the family of etfs i think you'd have a surprisingly diverse holding that is probably going to be able to capture a lot of return and limit a little bit of your risk through that diversification now one thing about that tesla holding uh kathy wood is sort of famous or infamous even for being one of the biggest tesla bulls out there uh she's basically been drinking the elon musk kool-aid since day one and she has drawn a lot of criticism i think for this really really passionate over-the-top belief in tesla and what it's capable of but if you look at the returns that tesla generated recently it's really hard to argue with that approach anymore but it's certainly proven out i think by hitching her wagon to tesla she's generated an incredible amount of alpha in these funds and i think it's gone a long way to silencing these critics that said i think there's still a small criticism to be made here in terms of the fact that tesla one holding is responsible for a lot of the returns that you're seeing in these funds if you were to snap your fingers and imagine that tesla had never happened the returns in these funds would still be fantastic but they wouldn't be nearly the numbers that she's racked in today personally i don't put a lot of stock in that if you look at some of these other holdings they've also generated some pretty fantastic returns and i think even had you removed the tesla returns out of the picture you'd still be really really happy that you had held arc through those time frames another consideration for the bull case here is that this idea of total addressable market size is potentially going to come true given this acceleration in terms of the underlying trends i think some of the incredible numbers for overall market share that arc is projecting are looking a heck of a lot more reasonable now that we've seen this acceleration in these trends let's talk about risk so what's the bear case for the ark funds well right off the bat i think you have to recognize the amount of promotion that ark is doing out there and you have to question it just a little bit i think investors are nervous that there's a pump and dump story happening in some of the holdings that arc is investing in personally i don't think that's true i think that they're mistaking the media presence that kathy wood and her team is putting out there as sales promotion i don't think it's necessarily that i actually think that that is in line with their strategy of connecting with disruptive startups through social media and crowdsourcing you can't connect with these people unless you're out there you want publicity you want a little bit of sensationalism around your company so that you can make the contacts you need with these early stage opportunities another criticism about arc and these disruptive technology trends in general is the potential for a bubble uh certainly it does seem reminiscent to me of the talk that i heard during the dot-com bubble i lived through that period i invested through that period and it was all the same talk about this time it's different these disruptive technologies are going to change the world old ideas about market share don't apply anymore the old rules need to be thrown out the window this is a new world all of those things were said back then and we saw what happened i have to say though that i i really find the story compelling even having lived through that time period i'm looking at the differences now in terms of this broad base of disruptive technologies back then it was really just the one it was internet-based services right and now there's at least these five broadly identified disruptive technologies that are all happening at the same time and that's the key thing so what's the final word well i think that if you invest in ark you are placing a bet on kathy woods ability to ride the technology s-curve how good is she and her team at picking out those early stage companies filtering out the ones that can't cross the chasm and then capturing those enormous returns from the ones that have she does have a track record for doing it and personally i believe she's going to continue to do it i really hope she has a solid team behind her because otherwise we're relying on the judgment of just one person which is not a great idea to go forward that said i do think there are some really really smart people at arc aside from just kathy wood at the end of the day if you're interested in aggressive growth right now in disruptive technology arc is a one-stop shop i really can't see an argument from going anywhere else and i would absolutely say that arc is a no-brainer buy for that aggressive growth part of anybody's portfolio so that's it guys that's the deal i hope you enjoyed this one please give the video a like subscribe if you haven't ring the bell and i'll see you in the next one
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