Cathie Wood and Her Analysts Break Down Top Stocks in ARK Space ETF – Business Insider

In a sign of the clout that star investor Cathie Wood still has over loyal disciples, the newly launched ARK Space Exploration & Innovation ETF (ARKX) has attracted almost $700 million in assets in just two weeks.

This rapid growth positions ARKX as one of the most successful ETF launches in history, perhaps only trailing State Street's SPDR Gold Trust fund, which was the fastest ETF to hit $1 billion in just three days in 2004.

The actively managed fund has generated a lot of buzz, but it has also received a lot of criticism for owning stocks that appear to have no apparent connection to space.

For example, the fund's top two holdings are infrastructure stock Trimble (TRMB) and Ark's 3D Printing ETF (PRNT). It also owns the stocks of Chinese e-commerce firm JD.com(JD) and streaming giant Netflix (NFLX).

It is no wonder that some investors are scratching their heads as to how these stocks made their way into a fund that invests in space technology. Even Ark analysts themselves admit to having "gotten lots of questions about specific holdings" in the fund.

To understand why these seemingly unrelated stocks ended up in ARKX, it is important for investors to know how Ark thinks about the multi-billion-dollar space industry and how it aims to tap into the opportunity.

In a Thursday webinar, Ark analyst Sam Korus laid out the four buckets of stocks that characterize the firm's space investing strategy. These are orbital aerospace, sub-orbital aerospace, enabling technologies, and aerospace beneficiaries.

Typically, when anyone thinks about space, they conjure up images of orbital aerospace, which encompasses companies that are launching and making satellites as well as companies operating satellite networks in outer space.

Based on Ark's research, orbital aerospace alone could generate $370 billion in annual revenue in the coming decade from almost nothing today, Korus said.

Sub-orbital aerospace refers to the red-hot area of space tourism that includes potentially hypersonic point-to-point transportation, high-altitude surveillance, and pseudo-satellite aircraft.

Korus is particularly excited about hypersonic point-to-point travel, which could serve a potential market of 2.7 million people and generate $270 billion in annual revenue.

"You can imagine going from New York to Japan in two to three hours, how profound a change this will be for the global economy," he said.

Enabling technology categorizes the artificial intelligence companies, robotics companies, and 3D printing companies that make all such space endeavors possible.

Aerospace beneficiaries involve companies that benefit from the activities going on in aerospace, such as, drone companies, precision agriculture, and air taxis. Specifically, Korus said Netflix could benefit from the second half of the population getting access to the internet and expanding their addressable market.

He explains that there are still 42 million Americans without access to broadband, by accounting for an average monthly bill of $50, and that comes out to a $10 billion annual addressable market just in the US. Globally, there are 3 billion people without access to broadband, even if the monthly bill is just $5, that comes out to a $40 billion annual addressable market.

"When you look at these four categories, you really see how many different technologies come together to make all of this possible," he said, "which is why we believe Ark has a unique perspective on space that can be driven by our research ecosystem."

In a SALT talks interview a week ago, Wood herself pointed to broadband mobile connectivity and hypersonic flight as the two biggest near-term use cases of space technology, but she acknowledges that Ark's space portfolio looks very different from typical space funds.

"I think when people look at our portfolios, they're kind of disappointed actually," Wood said in that interview. "Because they're not seeing space exploration or Mars, or what have you, they're seeing more mundane companies to some extent, but some very exciting ones in another sense."

One of the mundane but exciting companies is Trimble, which has four business segments including buildings and infrastructure, geospatial, resources and utilities, and transportation.

Trimble got its start as a company specializing in guidance and positioning systems, which use satellite data. Today, it also participates in precision agriculture, a type of satellite farming or site-specific crop management that helps make farming more efficient, according to Ark analyst Tasha Keeney.

"It's increasing productivity and automation across areas like construction and agriculture. It also offers positioning and mapping solutions for drones," she said. "So we think it fits well within the ecosystem."

Another point of contention about the space ETF is that the fund is by far the largest shareholder of Ark's 3D printing ETF, but Keeney said aerospace presents a killer application opportunity for the 3D printing ecosystem.

"It's still early days for the technology, so I think over time we'll see more companies perhaps specializing in aerospace 3D printing applications," she said. "But across the ecosystem, software and hardware players can be important players here in terms of enabling the next-generation machines used for aerospace."

The top 10 holdings in the Ark Space Exploration & Innovation ETF as of April 16 are shown in the chart below.

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Cathie Wood and Her Analysts Break Down Top Stocks in ARK Space ETF - Business Insider