The ARK ETF success story has been covered extensively over the past year (including multiple times on the ETF Focus blog as well). Five of the 7 ARKs posted 100%+ gains in 2020 and the flood of investment dollars that followed has made ARK a top 10 ETF issuers, an accomplishment unheard of for a niche ETF provider.
ARK is approaching the $50 billion mark in total assets under management, but about half of that belongs to the ARK Innovation ETF (ARKK). It has consistently been ARK's largest fund and gets the lion's share of the company's net inflows. ARKK's returns have certainly warranted that level of interest (it was, after all, up more than 150% in 2020), but it's time now to look forward to 2021.
Many of the ARK ETFs are still well-positioned to do well in 2021 (and some are already up more than 10% again this year), but one, in particular, stands out to me as a potential big winner in the current year - the ARK Fintech Innovation ETF (ARKF).
The investment case for ARKF is pretty clear. The fintech revolution has been growing over the past several years, but the COVID-19 pandemic has accelerated what was already a rapidly growing trend. Specifically, cashless transactions have been a rapidly growing trend as companies look to limit the possibility of a coronavirus spread through paper money. This along with the current coin shortage and the growth in online shopping have put this segment of the market in the spotlight.
Here's how ARKF is positioned as of the end of 2020.
The top three segments that comprise the portfolio - transaction innovations, customer facing platforms and frictionless funding platforms - all deal with the growth of cashless transactions and they account for a full 2/3 of the portfolio.
Square (SQ), as ARK notes in its quarterly update, was a top performer as its CashApp experienced strong growth despite the COVID-19 slowdowns. Pinterest (PINS) also enjoyed strong revenue growth last year, but LendingTree (TREE) and Alibaba (BABA) were laggards.
The acceleration of online retail is another area of the economy that will support growth in fintech. Prior to the COVID pandemic, the online channel accounted for just over 10% of all retail activity. During the pandemic, that number shot up to around 30%. A lot of that can be expected to be sticky and will never go back to traditional brick-and-mortar outlets. Many companies will continue developing their online platforms, so I expect this to remain a fast-growing trend.
And let's not forget about blockchain and cryptocurrency. Blockchain hasn't gained broad acceptance as fast as some anticipated, but it still likely has a bright future in fintech. Ever since bitcoin recently hit the $40,000, cryptocurrency has gained a lot of attention. While ARKF has no direct investment in cryptocurrency right now, other ARK ETFs do have positions in the Grayscale Bitcoin Trust (GBTC), indicating a willingness to add exposure to this area.
ARKF, along with many other tech-centric ETFs, is expensive right now as it trades at roughly 41 times earnings. But the growth and development in the fintech space is unquestioned. Last year's 108% return demonstrates the sector's high growth potential and investors have clearly jumped on board with the group's accelerating growth trend.
Another 100% gain in 2021 is probably unlikely, but if there's one fund in the ARK lineup that I'd be betting on here, it's ARKF.