Thanks to ARK taking over the entire ETF landscape, the "disruptive innovation" theme has been front and center. As is the case with just about everything else, success breeds copycats. The ARK Innovation ETF (ARKK) is the unquestioned leader in the space, but that isn't stopping other big name issuers from trying to capitalize on the trend.
I came across this over the weekend courtesy of Eric Balchunas on Twitter. It's a filing for the First Trust Innovation Leaders ETF.
Now there are a number of other innovation themed ETFs already in existence. A few have even been around for several years, but it's safe to say that none of them have reached the popularity that ARKK has.
The biggest competitor might be the SPDR S&P Kensho New Economies Composite ETF (KOMP), but it's only got around $2 billion in assets. Year-to-date, however, it's up more than 16% compared to the 4% gain for ARKK.
Another is the Direxion Moonshot Innovators ETF (MOON), a new fund which is up 34% so far in 2021, but has a scant $181 million under management.
The most interesting thing about ARKK and its peer innovation ETFs is how differently each of these funds looks. ETF Action posted this graphic detailing the portfolio overlap of this group.
Most of these funds have less than a 10% asset overlap with each other. Some of this will be due to the targeting of small-caps vs. large-caps, but it goes to show how differently the idea of "innovation" is to different issuers.
The big question is can First Trust actually compete with ARKK. It's getting a very late start here and it sure seems unlikely that it'll come close to catching it, but can it pick up enough traction to become ARKK's primary competitor in the space?
First Trust Innovation Leaders ETF
The first thing working in First Trust's favor is its size. The issuer's AUM total is twice that of ARK.
Not that this is an automatic predictor of success, but it does suggest that First Trust has the scale and distribution to make its new ETF a success.
You might point out that State Street and BlackRock, two of the industry's giants, have entries in the innovation space and they haven't largely caught on. How can First Trust have success where these two companies haven't?
Keep in mind, State Street and BlackRock aren't trying to compete with their disruptive tech ETFs. Their success has been built on offering ultra-low cost core portfolio ETFs. Their funds are mere ancillary offerings to the bread and butter of their lineups.
Compare that with First Trust's 10 largest ETFs.
Four of the issuer's top 10 funds are tech-focused and none could arguably be considered core portfolio holdings. A disruptive innovation ETF is more in line with what First Trust does than what Vanguard, State Street and BlackRock do.
About The ETF
According to the fund's prospectus.
The fund combines both a top-down theme identification process and bottom-up stock selection process to identify investments. The fund's process begins with the identification of themes in line with the fund's goal of providing exposure to emerging opportunities across sectors of innovation. Securities are selected based on an assessment of their investment merit and exposure to selected themes. A company's market capitalization and liquidity will also be considered, among other factors.
It goes on to say that the targeted companies could include...
...companies that are poised to benefit from the development of new products or services, technological improvements and/or advancements in scientific research related to digital transformation, advanced medicine, networks, cognitive computing and e-commerce.
The first question, of course, will be how the portfolio compares to ARKK. The First Trust ETF will be actively-managed, just like ARKK, but we won't have any idea of what it's invested in until it launches.
The themes it targets are certainly in line with those from ARKK - internet commerce and technology, genomics, etc. (although space exploration isn't mentioned). It's probably safe to say that it won't be taking a 10% position in Tesla like ARKK does, but it'll be interesting to see if it tilts more towards small-caps or large-caps. ARKK's portfolio has a $41 billion median market cap, so that could be a notable differentiator.
I doubt the First Trust Innovation Leaders ETF will approach the $20 billion mark in assets like ARKK has, but I do think it can easily (and possibly quickly) become the 2nd largest fund in the space. Granted, $2 billion in assets isn't a huge hill to climb, but it would make it a notably large fund.
If the economic recovery remains intact and recovery plays do well throughout 2021, I believe the First Trust ETF could have a successful launch and a good year overall.