Space: the final frontier. As an avid science nerd who grew up in the 1990s on a regular diet of Star Trek: The Next Generation and The X Files, space exploration has always piqued my personal interest. However, is space exploration a viable investment theme, and is the ARK Space Exploration & Innovation ETF (BATS:ARKX) a good investment?
The short answer is no. While ARKX trumps up SpaceX and disruptive reusable rocket technologies, the ARKX ETF does not own SpaceX and has a negligible allocation to reusable rockets. Instead, ARKX’s portfolio is littered with concept stocks that have performed poorly. I would personally avoid this fund.
The ARK Space Exploration & Innovation ETF is an actively managed exchange traded fund (“ETF”) that focuses on innovation across “space”. The ARKX ETF is lead managed by Cathie Wood, the Chief Investment Officer and portfolio manager at Ark ETFs.
The ARKX ETF focuses on companies that are leading, enabling, or benefiting from technological products or services that occur beyond the surface of the Earth, including orbital aerospace companies launching rockets and satellites, suborbital aerospace companies involved in ultrasonic transportation, enabling technologies like 3D printing, and companies that benefit from advances in space exploration (Figure 1).
The ARKX ETF has $260 million in AUM and charges a 0.75% expense ratio (Figure 2).
Making The Case For Space(X)
According to ARKX’s marketing “research”, space exploration is an important investment mega-theme as “satellites could bolster GDP growth” by providing global connectivity, while hypersonic travel can dramatically shorten travel times, and multiplanetary exploration can ensure the survival of the human specials (Figure 3; author’s note, please forgive the disjointed title of this slide and the three main points being conveyed, as it was copied directly from ARK’s investor presentation).
One of the most disruptive companies within the space exploration mega-theme is SpaceX. SpaceX’s reusable rocket technology is dramatically reducing the launch costs of rockets (Figure 4).
Part of SpaceX’s keys to success is the company’s ability to rapidly refurbish used rockets for new missions, with a turnaround time of around ~3 weeks in 2022, down considerably from the first SpaceX reusable rocket launch in 2017 which required almost a full year to refurbish (Figure 5).
SpaceX’s low cost and quick turnaround have allowed the company to deploy thousands of low earth orbit (“LEO”) satellites that are revolutionizing the delivery of satellite broadband internet to consumers (Figure 6).
In fact, Starlink was instrumental in helping Ukrainian civilians and its military communicate during Russia’s invasion in 2022, although Starlink’s denial of service to Ukrainian forces in recent months have become highly controversial.
With ARKX’s gushing coverage of SpaceX in its “research”, one would assume ARKX is a major investor in the company. However, that assumption would be false.
Figure 7 shows the full portfolio of the ARKX ETF as of January 2, 2024 and SpaceX is nowhere to be found.
Instead, ARKX offers what its investment team deem to be ‘near equivalent’ investments. Figure 5 shows ARKX’s portfolio, segregated by ARK’s themes as of September 30, 2023. 41% of the portfolio is invested in Autonomous Mobility, 17% is allocated to Intelligent Devices, and 16% is invested in 3D printing.
Reusable Rockets, the main “theme” of ARKX’s whole marketing presentation, only commands a tiny 4.1% weight in the portfolio. Instead, 40% of the portfolio is invested in concept aviation stocks like Archer Aviation (ACHR) and Joby Aviation (JOBY) that are trying to bring electric Vertical Take Off and Landing (“eVTOL”) technologies to market.
While eVTOL could be a promising industry in the future, it feels like ‘bait and switch’ when ARKX’s marketing documents focuses on the promise of reusable rocket technologies from SpaceX but actually invests unproven eVTOL companies.
To say ARKX’s performance has been poor would be a huge understatement. The ARKX ETF was launched in March 2021 and has returned a negative 9.4% p.a. since inception (Figure 9).
However, many stocks in the market are down considerably when measured against their March 2021 stock prices, so ARKX’s poor returns may not be unique. Perhaps the aerospace industry has gone through a downturn in the past few years.
To truly get a sense of how ARKX has performed, I compare the ARKX ETF against the iShares U.S. Aerospace & Defense ETF (ITA), a passive ETF focused on the aerospace and defense industry.
Compared to the ITA ETF, the ARKX ETF has lagged by an incredible 18.4% CAGR since inception (-10.0% vs. 8.4%) (Figure 10). The ARKX ETF also has a negative Sharpe Ratio compared to ITA’s 0.38.
Judging by the gap between ARKX’s returns and ITA, it appears the vast majority of ARKX’s poor performance can be attributed to its poor security selection and not because of its aerospace industry exposure.
Where Can One Get SpaceX Exposure?
For investors seriously interested in “space exploration” and SpaceX, I suggest they look elsewhere. The ARKX ETF gives little, if any, actual exposure to reusable rockets and other “space” related technologies.
Since SpaceX is a private company, retail investors will have to wait until the company actually comes to the market through an IPO or similar transaction in order to gain direct exposure.
Indirectly, there are some investment funds with venture capital/private equity holdings that may give investors exposure to SpaceX. For example, I recently reviewed the Scottish Mortgage Investment Trust (OTCPK:STMZF) with a 3.7% portfolio weight in SpaceX (Figure 11).
Space could indeed be one of the last untapped investment frontiers. However, I do not believe the ARKX ETF is the best vehicle to invest in the theme. While ARKX’s marketing documents hype up the disruptive potential of SpaceX’s reusable rocket technology, the ARKX ETF itself does not hold any position in SpaceX. Instead, over 40% of the fund is invested in ‘autonomous mobility’ companies that are pursuing eVTOL and other suborbital technologies. To get exposure to SpaceX, investors may have to look elsewhere, for example, the Scottish Mortgage Investment Trust has a 3.7% weight.
Since inception, the ARKX ETF has lagged horribly against the plain vanilla aerospace focused ETF, ITA. I would personally avoid the ARKX ETF.