What the Covid-19 pandemic has instilled in us is innovation is needed and can occur quickly. The lockdown has accelerated the pace of new and ground-breaking companies that will disrupt and revolutionize the world.
Innovation is the hallmark of entrepreneurship. Entrepreneurship inspires big dreams, bold ideas, and great outcomes. Successful entrepreneurs exploit change, improve productivity, and disrupt existing business models. Today, innovation is one of the hottest commodities. Innovative companies are names that investors might not be familiar with today. However, in the next year, five years, ten years, or more, these companies will become an integral part of our daily lives.
Genetic sequencing, cybersecurity, clean technology, smart glasses, nanotechnology, smart drones, and new social media apps are some of the innovations that will impact Main Street USA and Wall Street. Who does not want to participate in these innovative companies?
So, how do you future-proof your portfolio so that you can be able to participate in innovations?
On the ETF front, there is a new ETF launched last November 2020 by the name of Direxion Moonshot Innovators ETF (MOON). The word moonshot originally meant "long shot" to describe a monumental effort and a lofty goal. MOON is indeed an audacious attempt of the ETF fund to hit a home run.
The fund aims to give investors exposure to the 50 most innovative US companies. Although many believe it is another play on the meme theme, this is not entirely true. MOON consists of micro-cap, small-cap, and mid-cap names with a history of innovation. By tracking how much these companies spend on research and development (R & D) relative to their competitors and how innovative they are, based on the number of times they refer to innovation in their corporate fillings versus their peers, MOON differs from most other ETFs.
The largest sector weightings of MOON are Technology (46.33%) and Healthcare (20.99%). The top 10 holdings as of 4/15/21 are MVIS (8.39%), VUZI (6.68%), IBRX (4.70%), XONE (4.30%), VIR (3.16%), FCEL (3.08%), PLUG (2.68%), IRBT (2.40%), XNET (2.34%), and NNDM (2.19%).
Although MOON appears to resemble the more popular ARK Innovation ETF (ARKK), there are differences in their investment approach. The former is a passively managed ETF fund tracking an index, and the latter is an active ETF fund based on human decisions by a team of industry experts and analysts.
What differentiates MOON from other ETFs, including ARKK, is that it leaves the decision-making process in the hands of a text-reading computer algorithm. The team at Direxion and its index sponsor, S&P Dow Jones, gather a group of analysts to come up with a set of words such as to disrupt, revolutionary, and others that describe innovative efforts and achievements. They then trained a machine processing algorithm to search for these words in company filings and news services to identify innovative companies.
Critics of MOON warn that the ETF is too simplistic and can be easily manipulated. However, MOON remains an innovative approach to investing, as it completely ignores fundamental analysis and financial analysis. Some believe MOON represents a new breed of an investment discipline. Not only is this ETF involved in the growth potentials of mid-cap and small-cap stocks, but it also focuses its investment objectives across disruptive and progressive investment themes in 17 thematic subsectors. With the autonomous vehicle, clean technology, and genetic engineering being three popular innovative long-term themes.
Will MOON be a compelling alternative to the traditional high-growth ETFs and mutual funds typically purchased by long-term growth-oriented investors. Is machine processing algorithm the future of investing? Will MOON be as successful as ARKK in picking the next great innovators?