MOON - ARKX: A Space Exploration ETF That Struggles To Lift Off

2023-05-15 12:12:17 ET

Summary

• ARKX invests in companies focused on space exploration and innovation.
• Many profitable opportunities within the fields of research and tourism may reside in space and could well position this ETF for long-term profits.
• Space operations are quite expensive and often have ambiguous prospects, which could ultimately reduce investment activity within this field.
• I rate ARKX a Hold, as though space exploration is increasing in popularity, I think its investment-worthiness warrants more research.

Planet Earth holds countless avenues to profit and high returns, but what's beyond earth could be home to even more opportunities. With this in mind, space exploration and innovation securities could become profitable in the coming years as humans explore the endless void known as outer space. Though the possibilities are endless, so are the risks. I believe both the possibilities and risks are relatively uncovered thus far compared to the ground that astronauts and scientists could cover before the end of the decade. For these reasons, I rate the ARK Space Exploration & Innovation ETF ( ARKX ) a Hold.

This ETF has not performed particularly poorly in response to macroeconomic developments, but it has not necessarily responded positively either. Therefore, lack of momentum and the inability to sufficiently keep up with its broader industries of interest could be a primary concern with ARKX going forward.

Technological advances in space technology could allow more people to travel beyond Earth for professional and recreational purposes. Space becoming more accessible could lead to more cash flowing into space-focused names, and eventually more momentum in ARKX. Despite the limitless opportunities, there still exist many barriers to profitability within space exploration and innovation. Outer space-oriented institutions are capital-intensive companies , meaning many companies within these industries require substantial investment to build new technologies and initiate new missions. Furthermore, climate change and natural disasters remain threats to space exploration that those on earth can do little to control.

Strategy

This ETF does not track a specific index. Portfolio managers use internal research and analysis to determine which companies are best capitalizing on disruptive innovation. ARKX is therefore actively-managed. Fitting companies include those which lead, enable, or benefit from technologically-enabled products and services that occur in outer space. Contending stocks are evaluated on both "top-down" and "bottom-up" criteria. Top-down aspects mainly pertain to macroeconomic factors while bottom-up aspects regard fundamental and quantitative metrics on an individual level.

Holdings Analysis

ARKX invests mainly in industrial companies, with just less than half of its stock allocations appearing outside of this field. The most represented non-industrial sectors are technology, communication, and consumer cyclical.

This ETF's holdings reside mainly in the United States, with smaller representation from regions like France, Japan, and Hong Kong.

The top 10 holdings in this ETF account for just over half of the entire portfolio, with just the top five also comprising over a third.

ETF Performance Analysis

ARKX vs. Peers

The Direxion Moonshot Innovators ETF ( MOON ) and the Procure Space ETF ( UFO ) are both similar to ARKX but have their own performative caveats. ARKX could therefore have some fundamental performative aspects that could carry it in the long term.

As seen in the chart above, this ETF has lacked momentum this year. However, its price trend is relatively stable compared to MOON, and it has also stayed afloat more efficiently than UFO.

This case also appears when dating performance back to last year.

Though past performance does not necessarily shed light on the future, ARKX could offer an attractive blend of stability and resilience to those looking for exposure to space exploration and innovation.

ARKX vs. The S&P

Though ARKX may be resilient compared to some potential alternatives, previous performance indicates that this ETF is not impervious to economic downturn. This is clear when looking at ARKX's performance against the broader market during the past year.

This ETF lagged behind the broader market during October 2022 when rate hikes became especially aggressive . ARKX could have trouble attaining the same momentum as the S&P during unforgiving macroeconomic conditions. When looking at this ETF's performance against the S&P during 2023, it has outperformed to date. However, the movement of ARKX is still erratic compared to the overall market, as seen in the chart below as well as in its volatility metrics.

Though developments in space travel could serve this ETF well in the long-term, ARKX's volatility could still take investors for a bumpy ride.

Positive Outlook And Future Prospects

Space Tourism

Space tourism could grow substantially before the end of the decade. This growth is currently being driven by private companies like SpaceX ( SPACE ) and Blue Origin (BORGN), which could also be an essential catalyst for this market. These prospects are shown below.

The market for general tourism is on the rise, and when combined with space exploration could produce profitable synergies. Space tourism could also become more affordable and accessible in the future and drive up the price of ARKX.

Planetary Missions

With advances in space technology, planetary missions could become more frequent in coming years. For example, technological developments have allowed for missions in 2023 to Jupiter and the metallic asteroid known as "the metal world." More frequent and successful missions could lead to greater investments in space technology. This could then provide many space companies with enhanced revenue, and ARKX with the right momentum.

Negative Outlook And Future Threats

Outer Space May Be An Unworthy Investment

Traveling to outer space comes with numerous risks and uncertainties that could make space travel an unworthy investment with unstable and unpredictable returns. A lack of government funding in the future could also jeopardize space exploration companies. This was recently seen when Virgin Orbit filed for bankruptcy in April after a failed launch that destroyed investor confidence in the company and left them short of capital. Though outer space could have a lot to offer, the risks and liabilities involved in its exploration could put ARKX's returns at stake.

Troubles In Space

Catastrophes in space that could interfere with space exploration and innovation include but are not limited to solar flares, asteroid impacts, and coronal mass ejections. Climate change on Earth could make these disasters a greater threat to space excursions and space technologies such as satellites and rockets. If space travel became riskier as a result, then the industry could become less attractive and ultimately less profitable.

Conclusion

As this ETF is quite nascent and space exploration still has significant room for development, I think the near future could provide more indicators about the quality of ARKX as a long-term investment. During this same time, space could become a hot spot for both tourism and business. However, the treachery of this endless void remains a looming threat to ARKX's returns. In this regard, I give this ETF a Hold.

For further details see: