Space used to be a black hole where investment dollars went to die. Today, investors see only opportunity as the economics of the sector reset.
On Tuesday, ARK Investment Management launched ARK Space Exploration & Innovation ETF (BATS: ARKX). The actively managed, exchange-traded fund (ETF) will invest in innovative businesses that are benefitting from the aerospace disruption.
By the looks of it, this ETF should be a winner.
ARK is led by Cathie Wood. To suggest she has had a hot hand is an understatement. Last year, her flagship fund, ARK Innovation ETF (NYSE: ARKK), returned 150% due in large part to its massive position in Tesla, Inc. (Nasdaq: TSLA). Woods correctly predicted that investors were underestimating CEO Elon Musk and the growth potential for electric vehicles. She invested heavily. And even as the fund swelled in 2020 to $22 billion in assets under management, she refused to sell.
Last year alone, Tesla shares gained 695%, which was by far the best-performing large-capitalization stock.
In a strange twist of fate, the ARK Space Exploration & Innovation ETF debuted moments after SpaceX, a rocket company also run by Musk, test-launched its Starship SN11 rocket. The 394-foot-tall stainless steel spacecraft is a duplicate of another rocket tested earlier in March. Unfortunately, SN11 met with the same fate as SN10, SN09 and SN08 — a rapid unscheduled disassembly.
However, investors should not mistake explosions for failure. Nor should they overlook the opportunity. SpaceX is innovating faster than any aerospace company in history. Testing that used to take years occurs over only a few short months. Ultimately, Musk hopes to colonize Mars, and the huge Starships will play an integral role. Every test flight brings valuable data, putting the Hawthorne, California-based company one step closer to manned interstellar flights.
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The test flights also expedite the build-out of Starlink, a low Earth orbit (LEO) satellite constellation that will blanket the entire planet with 11,943 tiny internet transmitting devices, according to a Federal Communications Commission (FCC) document. So far, SpaceX has been able to deploy 1,384 satellites using its Falcon series of reusable rockets. CNBC reported in October 2019 that Starship could deploy 400 satellites during a single mission.
Those economies of scale, and reusability, are driving a new space economy.
SpaceX has cut the cost of deploying satellites by a factor of 20, according to a report in The Conversation. The economic implications of this kind of disruption are enormous. It changes everything.
Starlink is a good example of this. In the past, satellite internet connectivity suffered from latency. Because the cost of getting the equipment into space was so high, satellites were located in geospatial orbits 22,200 miles away. Starlink’s LEO satellites are only 340 miles from the Earth’s surface. While they cover less ground, there are many, many more of them.
The ARK Space Exploration & Innovation ETF is the best way to participate in the growth of the new space economy and all that it entails.
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Managers at ARK released a breakdown on Tuesday of the top positions. The largest holding at 8.6% of assets is Trimble Inc. (Nasdaq: TRMB), a software company that uses satellites tohelp the agriculture sector with water management. Kratos Defense & Security Solutions, Inc. (Nasdaq: KTOS) commands 5.6% of the fund. The San Diego-based company specializes in weapon systems and military satellites for unmanned drones. And sandwiched in between at 6.1% is an investment in The 3D Printing ETF (BATS: PRNT), a sister fund.
The investment choices are unconventional … which is sort of the point, though.
The entire aerospace sector is being disrupted. Some legacy players are going to face lost market share and dwindling profit margins as smaller companies find new ways to benefit from lower deployment costs. These more nimble businesses will also develop inventive ways to use the data, like Trimble.
The ARK Space Exploration & Innovation ETF debuted Tuesday at $20. Longer-term investors should strongly consider using any weakness to add new positions.
Best wishes,
Jon D. Markman
