Investing in the Future: Inside the Genomic Revolution Multi-Sector ETF (ARKG)

by on December 17, 2014 | ETFs Mentioned:

Investing in emerging technologies has long been regarded as a strategy reserved for those with a very, very high tolerance for risk. While there is a great deal of uncertainty that is rightfully associated with new technologies, the lucrative upside potential is also undeniable, especially for those with a long-term investment horizon. Cathie Wood, founder and CEO of ARK Investment Management, recently took time to discuss the newly launched Genomic Revolution Multi-Sector ETF (ARKG).

In this Q&A, Wood shares the inspiration behind ARK’s most recent launch, insights about the genomic revolution as a whole, as well as taking a deeper dive into ARKG’s portfolio [see also How to Simplify Investing in Emerging Technologies: Inside the ROBO ETF]. 

ETF Database (ETFdb): Broadly speaking, what is the genomic revolution? What are some of the biggest trends you see in this space over the coming years?

Biotechnological researchCathie Wood (CW): The genomic revolution is the result of the positive impact that the declining costs of genetic sequencing will have on several major sectors. These sectors include healthcare, information technology, materials, energy and consumer discretionary.

Though this revolution is in its infancy, the opportunity is immense, not only in genetic sequencing specifically but also in companies focused on and expected to benefit from extending and enhancing the quality of human and other life by incorporating technological and scientific developments, improvements and advancements in genomics into their business. One such way this is accomplished is by offering new products or services that rely on genomic sequencing, analysis, synthesis or instrumentation. 

ARK defines it as a revolution because although genetic sequencing is the catalyst, the effects of these technological breakthroughs will change our world dramatically. For example, they will revolutionize the treatment of cancer. Sequencing individual cancers will enable the creation of precise, genetically-targeted cancer therapies. Beyond health care, genomic knowledge will enable the development of better and more productive crops as well as new microbes capable of producing materials–such as oils and vaccines–at a lower cost [see our List of Health & Biotech Equities ETFs]. 

The applications and benefits will be quite provocative, making the world a better place.

ETFdb: What positive catalysts do you see on the horizon that could spur interest and investment in the space? What are some of the risks associated with this corner of the market?

CW: The cost decline of sequencing has accelerated the accessibility to this market at an unprecedented pace. To give some context, the cost to sequence the first whole human genome in 2000 cost over $3.7 billion and took 13 years of computing power. Since 2000, the cost to sequence a whole human genome has continued to collapse. From $3.7 billion, it dropped to $10 million in 2006, and to $5,000 in 2012. Today it costs $1,000. To date, the rate of the decline has outpaced Moore’s Law by three to four times. As shown below, at either the historic rate of decline or Moore’s Law, the cost to sequence a human genome will fall below $100 in the next five years.

Today, it costs roughly $1,000 and takes fewer than three days. With trillions of genomes–human viruses, crops, bacteria–waiting to be sequenced, the genomic revolution is ripe for investment.

cost of genome sequencing

As with most disruptive industries, there is a regulatory risk. Genetic information is the most personal kind of information, so maintaining patient privacy and preventing discrimination will be paramount. Given that genomics will inform life and death decisions, accuracy of tests will be crucial and may invite regulation.

ETFdb: What are some of ARKG’s defining characteristics? How might this ETF fit into a portfolio?

CW: There are two major defining characteristics of ARKG. The first is that ARKG is a multi-sector fund, not a health care fund per se, though it does have a good concentration of its investments in health care stocks. As the genomic revolution plays out, it will touch many sectors in the global economy like information technology, energy and basic materials. In fact, most information technology companies understand that the demands for computing power, storage, and analytics will be orders of magnitude greater in the genomic age than they have been in the computing age to date. We believe that true technologically enabled disruptive innovation will impact many ecosystems. ARK’s investment philosophy recognizes that and aims to capitalize on it.

The second defining characteristic involves the selection of the companies themselves. From our multi-sector viewpoint, we believe that benchmarks’ components don’t represent the full potential of the space. ARKG will hold companies that have little or no representation in some of the major benchmarks. We see this as an opportunity for those who choose to invest with us to have exposure to companies that will change the landscape of the genomic and healthcare space, yet are not appropriately valued in the market [try our Free ETF Stock Exposure Tool]. 

Our funds are designed to be used as a satellite strategy to core portfolios. Given our active management and selection of companies that are not in the large benchmarks, an ETF like ARKG will offer investors exposure to a range of companies across sectors that are on the bleeding edge of innovation through technology.

ETFdb: Can you give us a glimpse into some of the top holdings and your rationale behind them?

CW: Our top three holdings as of November 7, 2014 in the portfolio are: Illumina (ILMN), Monsanto Co (MON) and Thermo Fisher Scientific Inc (TMO). You can also find all of our holdings for the ARKG fund site on our funds site

  • Illumina, our top holding, makes next generation DNA sequencers, and is responsible for roughly 90% of all the base pairs of DNA sequenced. Today, Illumina’s high end machines can sequence in a year more human genomes than had been sequenced in history through 2013. Illumina is a major player in this space and will take the lion’s share of this market.
  • Monsanto is the world leader in agricultural seed development and distribution and allows for precision agriculture. Both crop yield and resilience improve with genetic modification, cut costs for farmers, and benefit consumers. Monsanto is the oldest genomics company.
  • Thermo Fisher produces the chemicals necessary for performing molecular diagnostic tests and genetic sequencing. It also owns Life Technologies’ Ion Torrent sequencing, which is catapulting Thermo Fisher into molecular diagnostic tests.

These holdings, companies that range from instrumentation to agriculture to chemicals, illustrate our multi-sector approach and the philosophy of investing in an innovation ecosystem as opposed to a single vertical.

The Bottom Line

The proliferation of ETFs has helped to both democratize and simplify the investment process. When it comes to accessing new technologies, investors can now do so while taking advantage of all of the benefits associated with the exchange-traded product structure, including: transparency, liquidity, ease-of-use, cost efficiency, and diversification. The recently launched ARKG ETF warrants a closer look from anyone looking to gain exposure to firms involved in the genomic revolution rather than invest in the space on a company-by-company basis. 

Follow me on Twitter @SBojinov

[For more ETF analysis, make sure to sign up for our free ETF newsletter]

Disclosure: No positions at time of writing.