What Did the ARK Space ETF Blast-off With?

With the launch of ARK Invest’s new Space Exploration and Innovation ETF (ARKX) (they are sub-advising EAXP in Canada - note: the fees are higher), we decided to look at how it managed to make an investment product out of something so new.

The commercialization of spaceflight may seem far off and leaders like SpaceX aren’t even public yet. However, every Starship represents a sum-of-parts from an array of companies on the ground that need only be space-adjacent. And in those, you can invest today.

ARK looks for companies that are “leading, enabling, or benefitting from technology-enabled products and/or services that occur beyond the surface of the Earth,” according to the fund description and objective, which defines “Space Exploration” as leading, enabling, or benefitting from technologically enabled products and/or services that occur beyond the surface of the Earth.

The ETF divides this into four types of companies:

• Orbital Aerospace Companies (companies that launch, make, service, or operate platforms in the orbital space, including satellites and launch vehicles)
• Suborbital Aerospace Companies (companies that launch, make, service, or operate platforms in the suborbital space, but do not reach a velocity needed to remain in orbit around a planet)
• Enabling Technologies Companies (companies that develop technologies used by Space Exploration related companies for successful value-add aerospace operations, including artificial intelligence, robotics, 3D printing, materials and energy storage), and
• Aerospace Beneficiary Companies (companies whose operations stand to benefit from aerospace activities, including agriculture, internet access, global positioning system (GPS), construction, imaging, drones, air taxis and electric aviation vehicles).

Here are the top 10 holdings: 

Source: ARK Invest, as of 3/30/2021

Launching – Where?

The fund’s largest holding is location-based solutions provider, Trimble (TRMB). With technologies involved in global positioning systems (GPS) it makes sense that a starflight might benefit from an Earth-based reference point – especially for take-off and landing. The company also produces solutions used in laser and optical technologies. Like most companies in the fund, while it waits to head into infinity and beyond, it’s active with established industries from agriculture to architecture.

DIY Rocketship to Mars

The 2^nd largest holding in the fund is ARK’s own 3D Printing ETF (PRNT). When in spaceflight, having the ability to print three-dimensional objects could be a game-changer. The ETF contains familiar names in its top 10 like HP (HPQ), Microsoft (MSFT) – and Trimble once again, all of which are involved in the 3D printing space.

Defence Contractors – No Surprise

Kratos (KTOS) is a high-tech defence contractor, providing microwave electronic products, satellite communications, training systems, modular systems, and defence and rocket support services and an unmanned systems segment. Most of the company’s revenue currently comes from the U.S. government, which could come in handy when commercial starships need parts.

L3Harris Technologies (LHX) is another defence contractor with a focus on sensors and radio components. The three-star rated company, like many prime government contractors, is highly specialized and has built up expertise and a security clearance that’s hard to replace in the military equipment space. “A new entrant would likely need to develop this know-how entirely from the ground up,” says Morningstar sector analyst Burkett Huey. With governments drawing from military resources for their space programs, “the only serious outside threat to a small subsegment of defence contracting, space launches, are the pet projects of multi-billionaires,” adds Huey.

Space Beneficiaries

This was the first holding on the list that had us scratching our heads. But then we remembered one of the ETF’s key focal points: companies that benefit from space exploration. In two-star rated JD.com (JD)’s case, it could be a beneficiary of a beneficiary. With improvements to satellite-based internet infrastructure like Starlink from space exploration, we could also see gains in online shoppers in a Chinese market that’s currently dominated by Alibaba. Only an extremely small percentage of China’s land area has 4G service – which might explain why there are only around 900 million mobile netizens in a country of 1.4+ billion as of the end of 2020. Senior equity analyst, Chelsey Tam thinks that GPS improvements would help with JD.com's drone-based delivery program.

Bulldozers…in Space!

This one might at first fall into the same skepticism that surrounded John Deere’s inclusion in this latest ARK ETF, but machinery that works well on Earth often works well in space. Why reinvent the hydraulic excavator?

“Komatsu (6301)’s superior product quality and brand name have helped to solidify its leading position in the global construction machinery space,” notes equity analyst Ken Foong, adding that Komatsu has also been actively investing in research and development, and focusing on artificial intelligence technology and Internet of things. “Its notable technological innovations include the first hybrid hydraulic excavator, well-known GPS monitoring system Komtrax, and the first commercialization of an autonomous haulage system for mining,” he says.

Jets Make Sense

Some of the least surprising entrants to the top ten of ARK’s space ETF are well-established aerospace and defence contractors, like Lockheed Martin (LMT) and Boeing (BA). One makes the F-35s and the other makes jumbo jets. Relevancy aside, they make decent investments with Huey describing four-star Lockheed as “the highest-quality defence prime contractor”, and three-star Boeing as occupying “the top of the commercial aerospace value chain.”

Long Distance Calls

Iridium Communications (IRDM) operates a constellation of low earth-orbiting satellites, offering voice and data communications services and products to businesses, U.S. and international government agencies, and other customers on a global basis. With that in with defence departments, Iridium may be the one sending the phone bill to the government after each flight. Iridium's solutions are also suited for industries such as maritime, mining, forestry, and oil and gas sectors.

The European Connection

Lastly, four-star rated Thales (HO). “The European defence and institutional satellite markets are shared between Airbus (AIR) and Thales, with the two companies often in partnership on major programs. The high technical barriers and the capability to manage large and complex space programs, in collaboration with governments, gives Thales a competitive edge,” says equity analyst Joachim Kotze. “Thales has attractive positions in European and international defence markets and will benefit from growth in commercial aerospace.”