It’s simple, innovation has the potential to create higher productivity – the same input generates higher output. As productivity moves higher, more goods and services are produced, and as such the company or the economy grows.
Innovative companies in turn will displace industry incumbents as they see an increase in efficiencies and productivity leading them to gain market share. The long-term growth potential of these innovative companies is what investors in this space are after.
In the late nineteenth century, the introduction of the telephone, automobile, and electricity changed the way we communicated, travelled, transported, and powered our economy. The world’s productivity went through the roof as costs dropped, creating demand across sectors.
Today, the global economy is undergoing a technological transformation that will shape the future. Innovations in areas such as artificial intelligence, robotics, DNA sequencing, energy storage and blockchain technologies are evolving at a rapid rate and seeing cost declines that are expected to further lead this growth.
BMO Global Asset Management offers three ETF series in partnership with ARK Invest that focus on disruptive innovations. BMO ARK Innovation Fund ETF Series (ARKK), BMO ARK Genomic Revolution Fund ETF Series (ARKG), and BMO ARK Next Generation Internet Fund ETF Series (ARKW). ARK believes innovations should meet three criteria and invests accordingly in these unconstrained, high conviction portfolios.
3 Criteria for Innovations
- Dramatic cost declines
- Cuts across sectors and geographies
- Serves as a platform for additional innovations.
Innovation ETFs can serve as a complement or a growth sleeve in a traditional well diversified portfolio. These innovation ETFs are for investors who have a longer time horizon and can serve as an effective complement to Canadian focused portfolios which are typically less exposed to technology. Below is an outline of two simple strategies for portfolio construction using BMO’s ARK ETF Series.
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- Core Satellite Approach: Asset Allocation ETF & High Growth ARK ETFs
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- For the core portfolio you can build your own or select an appropriate Asset Allocation ETF
- You can add a satellite position in an ARK ETF to add higher growth potential over the long term
- Barbell Approach: Low Volatility & High Growth ARK ETFs
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- Pair a low volatility ETF such as BMO Low Volatility US Equity ETF (ZLU) with an ARK ETF balance the higher risk growth solution with a lower volatility solution
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To those visionaries who believe in the power of innovation to change the way we live BMO’s partnership with ARK brings investors in Canada the option to invest in these game-changers. DNA sequencing innovations are aiming to cure cancer and other diseases (not just treat them). Blockchain technology is shaping the future of the internet (web 3.0) and solving problems around data security. We have our share of problems in the world today, but innovation solves problems.
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