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ETF Specialist

A Risky, But Promising, Innovation ETF

This actively managed ETF offers a thoughtful approach to investing in innovative companies, but it's not for the faint-of-heart.

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Innovation can reshape industries and change competi­tive dynamics, creating opportunities for innovative companies and risks for established players that are slow to adapt. New innovative companies are staying private longer now than in the past, but there are still publicly traded stocks that benefit from innovation. These include firms built around disruptive products and technologies, like Tesla (TSLA), and those that reinvent themselves, like Nvidia (NVDA), which leveraged its leadership position in the graphics processing unit market to build chips to power self-driving cars.

While significant mispricing is less likely in the public markets than the private, innovative companies are difficult to value because they often have little or no profits and there is considerable uncertainty about their growth trajectories. So, the market tends to discount their potential to compensate for the risk. This can create opportunities for astute investors, like Catherine Wood, who runs ARK Innovation ETF (ARKK). This transparent, actively managed fund targets stocks that will likely benefit from disruptive innovation and that are priced to offer attractive returns over the long term. This is a risky concentrated portfolio, but it will likely reward investors in the long run.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.