Mentioned in Video:
#ARKF seems to be #ARK Invest's least popular thematic ETF, probably because it lacks robots and gene-editing. Instead, this fund focuses on banking, #bitcoin, and all things #finance, which sets it up to disrupt some of the biggest industries of them all. #DaveLeeOnInvesting has done extensive research and talked to a lot of knowledgeable people about bitcoin, #blockchain, and #cryptocurrency on his channel:
It's easy to get swept away in the wow factor of the disruptive innovations that ARK Invest themes their funds around, no doubt the prospects of the leading diseases connecting humanity and advancing robotics are way more exciting than talking about insurance, housing and banking. It would be easy to phone it in on this tiny finance fund to talk about how cool Square is, laugh at a few Bitcoin memes and call it a day. Instead, I'd like to take up the challenge of changing hearts and minds by offering a different view on ARKF, a fund whose promise doesn't lie and how it's changing the world.
But why? ARKK, the most popular fund on our list is a combination of the other four thematic ETFs and the disruptive technologies in it will be felt everywhere. ARKG, ARKW and ARKQ are all disrupting big industries: pharmaceuticals, farming, retail, cable, traditional auto and big oil. And while these are each massive industries of their own, I feel they pale in comparison to the systems that the companies in ARKF are upending. So I'm presenting my analysis or rather my love letter to ARKF, ARK Invest's fund that chooses to rage against the machine by investing in technologies that promise a fair and financially freer tomorrow.
This is my first of what I hope will be many charity videos. Every red cent I get from it is going to a cause very close to my heart. Stick around till the end of the video and find out how together, you and I, can rage against the machine as well. For now, let's dive right in. Here's the thing about money. Money doesn't belong to you or me. We hold it, but somebody else prints it, controls it and monitors it.
Actually, lots of “someone elses”, from banks to credit bureaus to governments, just to name a few. Directly or indirectly, these third parties are intermediaries, people that every transaction has to pass through to do things like make sure you're not spending the same money twice, making sure you have the money to spend and in some cases deciding if you're worthy enough of spending it at all. In my opinion, there are three fundamental shifts responsible for disintermediating or un-middle-manning financial institutions.
One, digitizing the manual, physical processing and paperwork. Two, introducing automation and ultimately artificial intelligence. And three, cutting the middleman out of the picture entirely wherever you can. These are the themes of all the holdings in ARKF: digitizing, automating and disintermediating the barriers between you and the things you wish to acquire. Before we go any deeper into the fund, let's get a feel for what these intermediaries look like. We wait in physical lines for tellers and agents and we wait in digital lines for credit and loan approvals.
And we pay fees when we don't have enough money to be worth it to the bank holding our money in the first place. Banks aren't just businesses. They're institutions. They have the biggest buildings in the best part of town, physical real estate with big footprints and bigger expenses. They buy software and more software to support that software and employ hundreds of thousands of people to run it. The power in staffing and maintaining of these institutions is no easy task, and to sustain themselves, they need customers.
So to get those customers, they advertise. Not just digitally, but physically via mailers, pamphlets, pre-approved credit lines and so on. And most people only provide the bank with just a little more money than the cost the bank paid to acquire them in the first place. But we'll get back to that. I'm painting this picture because these banks are big, not just big, but big. Tens of thousands of physical locations employing hundreds of thousands of people, doing jobs that are ripe for disruption.
And just like in David and Goliath, this bigness could be the very thing that topples these giants. That's because this bigness is expensive to maintain. When you tally it all up. A big bank spends anywhere from three hundred and fifty to fifteen hundred dollars to acquire a single customer, and that averages out at around nine hundred and twenty five dollars. If we just used the average, that means the first nine hundred and twenty five dollars a customer earns them just covers the cost it took to get them as a customer in the first place.
That's what these two plots are showing. In the first plot, the x axis is the customer lifetime or how long a customer is with the bank. The Y axis shows how much money the bank makes off that customer. CLTV stands for customer lifetime value. The blue line represents traditional banks and as you can see, it takes an average of eight years for a bank to break even on the average customer. Digital wallets simply do not have this problem, because it costs them virtually no money to acquire new customers at all.
The second plot is almost the same, except it shows customer lifetime value on the Y axis, as a function of account balance on the x axis instead of time, digital wallets break even instantly, since they still don't have those customer acquisition costs, while retail banks need something like sixty five hundred dollars in an account to break even on that customer, which is challenging since the median American household only has forty eight hundred and thirty dollars in savings, with 31 percent of Americans living paycheck to paycheck and having no savings at all.
I'm not making a political statement here, by the way. I'm simply pointing out the huge difference between how much money a bank wants their customers to put in and how much money their potential customers have in the first place. And that's not even counting the 20 million people in the U.S. alone who are still completely unbanked. 20 million people in the U.S. is as many as all of the customers Citibank has in the U.S., by the way. So it's a massive opportunity.
And when you zoom out and look at the whole world, that 20 million is just a drop in the bucket compared to other regions. Almost half of Central Asia and Europe is unbanked, 60 percent of southern, eastern and southeastern Asia, two thirds of the Middle East and Latin America and 80 percent of sub-Saharan Africa are unbanked today. That's 200 million revenue generators and closing in on two billion adults worldwide currently unbanked. So what could this institutional disruption look like?
It looks like mobile wallets providing a larger and larger chunk of all loans. It looks like mobile wallets being able to provide fair rates because they don't have high customer acquisition costs. It looks like popular consumer brands like Apple offering their own credit cards to customers they already have and don't need to acquire again. And just to be clear, that brand power is massive. This is a Google Trends plot showing a search history versus time for the Chase Sapphire card versus Apple's credit card.
As you can see, it was announced in early 2019 and it's been much more popular as a search term than Chase Sapphire Card. This is a massive problem for Chase because their credit card interest fees account for more than twenty five percent of their revenue. It's an even bigger problem for Discover, Synchrony and Capital One, all of which rely heavily on credit card interest rates for revenue generation. My background is not in economics, but a good rule I found is if you're making money off of something people hate, like interest fees, chances are someone will find a way to disrupt you.
And that's a statement you can take to the bank. A couple of slides ago, we saw that 50 to 60 percent of Asia is unbanked. These people that the banks don't support transacted over twenty four trillion dollars in 2018 through mobile wallets, up from one trillion just four years earlier. And that's almost twice of China's entire GDP. Remember, GDP doesn't account for things like gifting, direct peer-to-peer transfers, tips and so on. And if that's any indication of what's to come in America, we could be looking at a similar compound annual growth rate of digital wallets here as well.
Low customer acquisition costs due to being digitally native is just the beginning. The amount of data a digital first company can gather is orders of magnitude bigger than those who collect paper forms and file physical paperwork. And if there's one thing you should know about artificial intelligence, it's that it takes a lot of data to train it up. And once it's trained, it can do a job at least as well as a human expert, but it doesn't need things like health benefits or breaks or an office, all of which show up, as – you guessed it, customer acquisition costs.
The other thing these vast amounts of data allow for is the drastic reduction in lines and wait times. Customers can automatically be approved for loans in a matter of minutes instead of a matter of months based on machine learning algorithms like automated risk analysis and pre-approving people for the right financial products. These data sources update all the time as consumers use CashApp and storefronts use Square's payment terminals; instead of just looking at forms and documents, you only fill out every once and again.
These large datasets offer new machine learning applications, while banks send out paper mailers to all of their customers, which again costs a lot of money, digital wallets can automatically match you to financial products, services, offers, discounts and even storefronts based on your purchasing behavior and the behaviors of customers like you. Automatically matching people to the right offers is just another example of unsupervised content matching, just like the ones discussed in my deep learning video and being able to put exactly the right services in front of exactly the right people for free all the time is a win win for everyone.
And when a service keeps offering you win wins, you're more likely to buy into their future offerings. Just like when people who buy into Apple's hardware and software ecosystems are more likely to take a chance on their credit card. Or, when people who buy into Square's financial ecosystem are more likely to take a chance on new products and services like those involving cryptocurrency. In my day job, I'm the chief strategist at an advanced web technology company, and our stance appears to match ARK Invest's on the matter, which is that payment platforms like Square and Venmo will start offering points and rewards in the form of cryptocurrency and provide a frictionless way to spend it. Because Square owns both sides of every transaction,
that is, the payment acceptance side for a business and the payment sending side for a customer, it can allow any business to accept Bitcoin and any customer to send it, all without ever leaving Square's ecosystem. In my company's opinion and in my interpretation of ARK's opinion, this massive reduction in the friction of using cryptocurrency will greatly increase its adoption. Since Square, Venmo, Google Wallet and Apple Pay could enable both sides of any transaction to simply treat crypto as cash.
The results of low customer acquisition costs, leveraging artificial intelligence and cutting out as many middlemen as possible speak for themselves. In 2017, CashApp was the 14th most used financial app and PayPal's Venmo was seventh. In 2018, CashApp was number ten and Venmo was number four; and in 2019, CashApp and Venmo were basically tied for first place and ARK Invest is closely tracking their rivalry. And funny enough, apps by giant banks aren't really part of that conversation.
So, this is the lens through which I want to present ARKF, ARK Invest's FinTech Innovation Fund. It's filled with companies that are digitally native, leveraging automation and artificial intelligence and providing peer to peer services, all of which drastically reduce middlemen and customer acquisition costs while increasing satisfaction by smartly matching people and services. There's one more elephant in the room that we shouldn't ignore, and that's Bitcoin. Not just because it's the ultimate example of true disintermediation, but because Square and PayPal, the two big digital wallet rivals, are both going big on it.
I am not a cryptocurrency or block chain expert, so this will be a high level overview and we'll dig more into it in future videos. The first question we should ask is what kinds of problems is Bitcoin trying to solve? Very broadly speaking, Bitcoin tries to solve problems associated with the way intermediaries, that is, governments and banks choose to regulate money. Think about things like money printing, transaction fees for sellers and consumers, and even things like the ability of institutions to seize your assets.
In addition, Bitcoin still has to solve the same problems that the current system has already solved, like storing value and detecting fraud. Here's what Yassine Elmandjra, ARK Invest's crypto asset analyst has to say in his recent interview with Dave Lee about Bitcoin as a transactable currency. Just one quick note here. In addition to reading ARK Invest's publications, I also listen to Dave Lee's content on Bitcoin, starting with his interview with Yassine and then working back through a lot of his other material.
The same material that's making him skeptical is making me increasingly bullish on Bitcoin, not by comparing it to a stock like Tesla, but when I think about it as its own type of asset with its own economics and analytics. So just be aware that different people are looking at the same information and coming to very different conclusions about the future of cryptocurrency.
Being at ARK, which we were mostly focused in the public equity space. The analogy that you bring to test our high growth stocks is often the analogy that's tied into Bitcoin, right?
It's like, how do you value Bitcoin? Like you can value stock. And the simple answer is you can't and you shouldn't. And in the end, in the framework by which you can understand Bitcoin's value should not at all be driven by analogies to understanding the equity space. So there is no cash flows in Bitcoin. And so you can't figure out a way to have some sort of reconciliation to a balance sheet like you can have on Tesla and justify whether at any given point Bitcoin is overvalued or undervalued. And that the risk it's not necessarily riskier than a high growth stock.
It is just much different in its value accrual behavior. And that's really what it comes down to. So where I agree with you is demand is so its value is exclusively and you're like partially, I say exclusively driven by demand relative to supply. That is the only thing that's going to drive Bitcoin's value, and it is the willingness to hold that asset. Now, there are people who argue that Bitcoin has no intrinsic value. I'd argue that the very concept of intrinsic value is relatively
limited, especially in this context, rather, what Bitcoin has, are intrinsic properties that might render utility and therefore value. And in the case of Bitcoin, like you mentioned, Bitcoin's utility is that it allows people to store outside of the currency system. And we spent the last hour discussing Bitcoin's value proposition. That is something that you can really only get in Bitcoin. So for that reason, it's there is a clear demand driver for why you'd want to hold Bitcoin right? Now,
the second point is, OK, naturally, if the only demand lever for Bitcoin or the only value lever for Bitcoin is volatility, then people get out of the asset. It's going to crash and people get into the asset it's going to appreciate. And that's it. Really. Bitcoin's volatility actually highlights the credibility of its monetary policy and its ability to have demand, be that or sole value driver. So I want to just debunk that. Bitcoin is volatile and therefore unusable by saying that Bitcoin is volatile because it has explicitly chosen free capital movement and an independent monetary policy and forgone that fixed exchange rate.
And by forgoing that fixed exchange rate, then you have massive fluctuations in the price. And so does that mean that that Bitcoin can't be valued as an investment or it's riskier as an investment? I would say the riskiness comes from just the relative nascency of the investment, right. It's just that it's a 10 year, no I wouldn't say it's a stock that's been around for 10 years. It's a 10 year asset. Right. You look at gold, that's a multi thousand year asset.
So, the risk comes in just the relative immaturity of the asset. There is something called the block chain, which people like to use as this buzzword, but that actually has a lot of value within the Bitcoin network that allows for you to have think of it as like this 24/7 transparent global balance sheet that in addition to being able to verify transactions and supply, also allows for you to determine what sellers and buyers are thinking at any given moment, given their decision to transact Bitcoin transactions, being a proxy for selling and holding Bitcoin, being a proxy for increased demand.
With that being said, with the birth of a new asset class comes the birth of new valuation tools and metrics to deconstruct not necessarily a balance sheet to create a discounted cash flow model. But in this case, if you agree that demand is the only driver for value, then to deconstruct buyer and seller behavior and to really break down raw supply and demand of the network. And thanks to the transparency of that network, you are able to, as an investor, see different patterns of holding behavior emerge, which might help you dictate whether something is overvalued or undervalued at any given time.
OK, we finally have the high level context of the types of disruptive innovations occurring in financial technology and how they're set to disrupt some of the biggest institutions on earth that currently stand between us and the things we wish to acquire. Let's take a look at the fund itself. Its top 10 holdings are filled with companies focused on making money easier to access and disintermediating transactions of all kinds. It's enjoyed healthy gains of almost 20 percent since the start of the quarter, and the fund has doubled in assets under management in that time.
Here, some of its biggest buys and sells for the quarter. So far that is quarter four of 2020. The average increase in position size seems to be around 70 percent. So this table is colored where outsized buys are more green and outsized trims are more red. That top position is just cash. And then the outsized positive position changes are in Lightspeed, Ticker symbol LSPD, DocuSign, DOCU, Intuit, INTU, PayPal, PYPL and Splunk, SPLK.
And there are outsized trims in Zscaler, ZS and Slack, WORK, both of which are nearly completely out of the fund. If you look at many of these red and orange rows, you'll notice that they come with massive price increases, suggesting to me that ARK Invest simply sold high to buy back in at better prices in general. They're currently in the process of getting out of Slack, however, which we'll cover in another case study down the road.
ARKF currently has forty eight holdings, not including cash, with Square making up just under 11 percent of the fund. Here's what the relative position sizes look like as of Friday, December 11th, in a pie chart and in bar chart form. And we can look at the overlap between ARKF and ARK Invest's other funds. The rows on the table to the left are the stocks in ARKF from biggest to smallest, and the columns are ARK Invest's other thematic ETFs.
As you can see, there's a fair amount of overlap with ARKK, the General Innovation Fund that everyone loves, and ARKW, the next generation Internet fund since being digitally native is an important quality of stocks in both ARKF and ARKW. On the right is just a plot showing you how small ARKF is compared to the other funds, reminding you that the fund is still tiny overall, making up only about five percent of ARL Invest's total assets under management. ARKF has just over doubled in price in the last year, performing better than ARKQ but lagging behind ARKG, ARKW and .ARKK.
And it is actually the lowest performing fund since its inception in early 2019, gaining a measly one hundred and thirty six percent in that time. During Dave Lee's interview, Yassine shared something about ARK that really spoke to me. Here's what he said.
I'd say ARK really prides itself on being very ambitious and entrepreneurial and having the grit to take risks. And so there should be really nothing stopping you from setting up a Twitter account, writing a few blogs, reaching out to a few people, sharing those blogs and then sharing that.
I think Twitter in particular is such a powerful meritocratic tool that has very low barriers to entry, but that can be extremely valuable. So don't hesitate to reach out to people who have their DMs open, to tag people in threads. All these things I think are very valuable that I realized before joining ARK, but when joining ARK was like that was the fundamental research strategy that ARK incorporated in their own day to day. So, you know, Cathie, our founder and CEO/CIO, prides herself on the open source research ecosystem that ARK has built, where information is increasingly becoming commoditized,
you know, in order for us to have an edge, we need to participate in this community. And whether that is sharing our research, whether that is inviting people to our podcasts, tweeting, posting things on Medium, whatever it is, it's like the world is out. You have to believe that the world is there to conspire to help you. And there should be nothing stopping you from, you know, telling yourself that there will be nothing stopping me from getting what I want to get.
Just like the companies in ARKF are disintermediating the barriers between us and the things we wish to acquire. Colleges and institutions are increasingly standing between us and the knowledge we wish to acquire. Like banks, colleges have huge costs associated with physical buildings, manually intensive administration, and lots and lots of middlemen. The cost of tuition and textbooks have roughly tripled in the last twenty to thirty years, far outpacing the inflation of even costs like health care. This little YouTube channel can only exist because ARK Invest has decided to share their information with the world for free when so many other colleges and journals lock information far less valuable behind far greater paywalls.
This is the machine I'm asking you to help me rage against, and the ways you can help are easy. There's a little known website called Wikipedia. Oh, you've heard of it? Yeah, it's actually the 13th most visited website on the planet, just two spots below Amazon. That's five spots above Reddit and seven above Netflix, even though it sells you nothing and has no advertisements. Moving forward, the charity for Ticker Symbol: You will be the Wikimedia Foundation, whose mission is to grant every human on earth access to all human knowledge.
Here's how we can ARKF these middlemen that stand between us and the knowledge we wish to acquire. One, head over to Wikimedia and throw them your change every once in a while. Trust me, it adds up. Two if you're not into giving money, I totally get it. Share this video and I'll donate mine. Every penny this video earns will go to Wikimedia and I'll keep you updated in the community tab of this channel. Expect more content for charity in the future.
And three, keep learning, keep reading and keep sharing your ideas and knowledge with others, not just here on this channel, but in every community you're a part of. Don't let anyone or anything stop you. This is Ticker Symbol: You. My name is Alex, reminding you that the best investment you can make is in you.
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