In the Space Race Between UFO and ARKX, One ETF Flies Closer to the Stars

Hello, new contributor here. You most likely don't know me, but you might know the tickers of some of the exchange-traded funds that I have had a hand in bringing to market. I have been developing thematic and other focused indexes since 2008 and have played a key role in developing the initial indexes for funds such as First Trust Global Wind Energy ETF , Amplify High Income ETF , ETFMG Prime Cyber Security ETF , First Trust Cloud Computing ETF , ETFMG Prime Mobile Payments ETF , Wedbush ETFMG Video Game Tech ETF , and more recently, Amplify Pure Junior Gold Miners ETF , Amplify ETF Trust - Amplify Cleaner Living ETF and a handful of UCTIS products in Europe with fellow Real Money contributor Chris Versace. While I am not a stock picker or soothsayer, I do have a very particular set of skills. These aren't the same as Liam Neeson, but I too have acquired them over a very long career and they are skills that make me a nightmare for ETF issuers that are trying to pass loosely written screening criteria as the basis for a thematically pure ETF. What I hope to do in this, and future articles is to help bridge the difference between what ETF exposures issuers are telling shareholders they have and what those exposures actually are. In this first article, I take a look at two ETFs that are focused on that great, final frontier -- Space. Procure Space ETF Up until recently, space exploration was the domain of nation-states. That has clearly changed over the past five to 10 years. Recognizing this, the folks over at Procure ETFs launched the Procure Space ETF in April 2019 with not just a strong ticker game (UFO) but a strong research partner in Space Investment Services LLC. The fund breaks out the industry into five segments: Ground Equipment Manufacturing Dependent Upon Satellite Systems Rocket and Satellite Manufacturing and Operation Satellite-based Telecommunications, Radio and Television Broadcasting Space Industry Segments - Space-based Imagery and Intelligence Services Space Technology and Hardware The index methodology (which is the best and most direct path to understanding what any index-based ETF is doing and how they are doing it) states that Non-Diversified companies (companies with revenue exposure >50% to a segment) are allocated 80% weight in the portfolio and any Diversified names (revenue exposure <50% to a segment) are given an aggregate weight of 20%. Positions are capped at 4.8% (Non-Diversified) and 2.4% (Diversified). The index is reconstituted (reviewed and rebalanced) in June and December. In reviewing UFO's holdings, there are a couple of names that I'm not crazy about for this portfolio, namely Comcast and AT&T . I get the rationale for including DISH Network and Sirius XM simply because without satellite infrastructure these companies wouldn't exist. The only other name I'd skip is Ball Corp . While the company is a legitimate player in aluminum component manufacturing, that currently represents only 15% of Ball's latest reported revenues. Looking at quarter-to-date returns and more importantly, sources of those returns, the top-10 contributors to return account for approximately 40% of the fund's weight and roughly 158% of period return (9/30 - 11/5) by my attribution math. These include solid space names such as Viasat , Loral Space & Communications , Maxar Technologies and Trimble , to name a few. ARK Space Exploration & Innovation ETF Approximately two years after the launch of UFO, Ark Invest entered this market with the launch of the ARK Space Exploration & Innovation ETF (ARKX). ARKX is an actively managed ETF, which means there is no index that the fund tracks. To better understand this funds strategy and approach investors need to review the fund prospectus document. The prospectus breaks down ARK's worldview on Space into four segments: Orbital Aerospace Companies Suborbital Aerospace Companies Enabling Technologies Companies Aerospace Beneficiary Companies In terms of selection criteria, names that end up in the portfolio represent the Adviser's highest-conviction investment ideas within the theme of Space Exploration. In terms of weighting, securities are conviction weighted. We see the results of conviction weighting in the latest portfolio (as of 11/5) with Trimble topping the list at 9.09% followed by ARK's own 3D Printing ETF at 7.94%, Kratos Defense & Security at 6.42% And Iridium at 5.11%. Looking further down the list we see some familiar names from UFO like Garmin , Lockheed Martin , Airbus (AIR-FR) and Thales (HO-FR). We also see some head scratchers (from a space perspective, anyway). Deere & Company might not be anyone's first thought when it comes to space, but the company has been on the forefront of agritech in the form of GPS-guided tractors and other vehicles for some time now and has its own satellite network. It's tough to attribute revenue exposure to this view but it is doable and a good out-of-the-box add. Where I get lost in this constituent list is with names like Amazon , Alphabet , Palantir and Netflix . With regards to the almost 8% allocation to PRNT, I agree that 3D printing has already begun to be adopted by many industries and will indeed lead the way for just-in-time and other specialized part manufacturing. That being said, PRNT as a component of ARKX is problematic for me if only for the non-space exposures PRNT brings like medical device/implant manufacturers Straumann Holding AG (STMN-CH), Align Technology and Conformis . Further, while there are a number of more industrial focused names in the portfolio, including 3M , General Electric and Siemens AG (SIE-DE), those companies reporting makes it difficult at best to determine their exposure 3D printing, let alone space. In reviewing the same quarter to date (9/30 - 11/5) contributors to return, the top-10 contributors to return for ARKX account for about 42% of the portfolio's weight and approximately 82% of period returns. The top contributor is Unity Software , which sells modeling engines for 2D, 3D, VR and AR environments. This is a company that does have great promise in the engineering development arena but right now is squarely targeting the video-game sector. The second largest contributor to returns is the ARK 3D Printing ETF, which I described above. To be clear, the other stocks in the top 10 include some names shared with UFO, such as Trimble and Iridium , but overall, for a fund that purports to provide exposure to the space economy much of the return profile of ARKX seems to point to names a lot closer to earth. Bottom Line Some might say that investors in an active fund, especially one focused on innovation, should be relatively indifferent to the source of returns and indeed, ARKX more than doubled the return of UFO in the quarter to date ending Nov. 5. My point here is that ARKX was not developed to be and is not sold as a go anywhere alpha-seeking fund. I have no doubt in ARK Invest analysts' ability to pick winners but they have committed what I consider to be the original sin of thematic investing, which is reaching too far outside the scope of the theme to find names for the portfolio. I'll simply say that, regarding these two funds, if you are looking for a truly targeted exposure to the burgeoning space industry, I would recommend you take a good look at UFO.

In the Space Race Between UFO and ARKX, One ETF Flies Closer to the Stars

For a fund that purports to provide exposure to the space economy much of the ETF's return profile points to names a lot closer to earth.

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