Retail Investors Advantage Over Ark Invest
So far this year, Ark Invest has been given more money to manage than both BlackRock & State Street.

In total, Ark ETFs have approximately $55 Billion assets under management. (For comparison, that is still tiny in relation to BlackRock, whose 383 ETFs have total assets under management of $2,126.26B)

Still, these huge inflows of money holds an interesting implication for us retail investors.

Ark is on track to be managing $100 billion dollars within the next year or two. When you're managing $100 billion dollars, you become less interested in investing small companies that have only a $1 billion market cap. And there's good reason for this.

A $1 billion dollar company's entire market cap amounts to only 1% of a $100 billion dollar fund. Plus, you're not going to be able to buy the whole company even if you wanted to- so the shares you can buy are going to be a even smaller than 1% of your portfolio.

It becomes such a tiny piece of your fund, it not even worth it to do the homework and ongoing due diligence necessary to add it the ETF.

Buying shares in a company that can't move the needle is actually a drain on analyst time and resources that could be put towards following companies that can.

Post media

Additionally, it's very hard to get in and out of small companies without moving the stock's price. If the amount of shares you wants to buy represents 20% of all outstanding shares of the company, guess where the share price is going to go as you try and buy it? Yeah, up.

So what does this mean for retail investors? It means there is a sweet spot in the $1B-$3B market cap range where our time spent researching is more differentiated, and therefore more valuable.

If you can find a company that has a compelling reason why it will go from a $2 billion to a $6 billion company, you get first dibs, because even if Ark agrees with you, they won't buy it until it can make a difference for them. Some companies that might fit this discription are Bionano $BNGO and DermTech $DMTK (which, full disclosure, I own shares of both- you can check my Commonstock profile page for further info on how much I'm allocating to them)

"Smaller companies carry greater risk", is true, but that's generally because there is less attention and research on them. That means directing your own attention and research here can be extra fruitful for you. If you can find a good company before the analysts are allowed to buy it, that's another huge tailwind for you.

And this is an advantage that you will likely always have. Not to be mean, but none of us will (probably) ever be billionaires. So, for your own personal portfolio, you have a perpetual advantage over big funds when looking at smaller cap companies.

I'll be publishing another memo on Bionano in the next week or so, if you have done any work looking into this company, I'd love to chat with you.
Brad Thibeau's avatar
$XONE is another fantastic example, even smaller. ARK started building a position in the 10s but obviously can’t dump it all in one day. Mid-long term calls when you start seeing those companies show up in ARK transactions and you’ve found yourself a money printer!
Chris Tolvkin's avatar
@brad I'd love to hear more details about how to do this 'mid-long term' calls strategy. Is this something to do with options? Do brokerages like Vanguard allow you to do this?

Is a 'mid-long' term about 1 - 3 months in the future?

And a call is an bet that you think the price will go up, correct?
Nathan Worden's avatar
I'd also be interested in reading a memo by @brad chronicling a call play, how to do it step-by-step, and how it turned out 🙌
Brad Thibeau's avatar
@tolvkin @nathanworden I’ll put some “pen to paper” tonight!
John Whipple's avatar
@tolvkin - yes, long term calls are a kind of option, that in this case you would "buy to open", which give you the option to buy the stock at the strike price at a future "expiration data". I'm curious to hear about what @brad's strategy is here, but generally when I think about long term options, I look to buy call options with expiration dates at least 1.5-2 years out (also known as LEAP options). That being said, the further into the future an option's expiration date is, the higher the premium you pay to buy that option.

I can't explain all the technical details, but the reason I usually look to buy that far into the future is that if you expect the price of the stock to rise in the near term (say 6-12 months out), the underlying price of the call options expiring two years into the future will increase at an out-paced level from the underlying price of the stock itself. You can lock in those gains by then "selling to close" the call option you bought. Happy to chat more if you have questions!
Chris Tolvkin's avatar
@brad looking forward to it!

@whipple what brokerage do you buy options through?

I have heard enough people talking about options, I think I want to try and incorporate some of these ideas into my own investing. But I "learn best by doing", so seeing the UI in front of me, and looking at the choices I have helps me think through how it all works.
John Whipple's avatar
@tolvkin - most brokerages offer the option (no pun intended) to trade options, but may have an options trading approval process. I trade on Schwab and had to apply via a form like this ( I know Robinhood offers this as well, but not sure if its something you have to apply for.

Trading options can definitely be more risky than just buying stocks though (especially if you get into selling puts), so please do your own research on strategies as well!
Ryan C.'s avatar
Great article. $EXPC - another great example of how any investment they make really has massive movements on stock price...
Nathan Worden's avatar
$EXPC is the Indian helicopter platform company correct? And they go by Blade? Or Experience Investment Corp?

But yeah, totally agree- Ark started a position January 11th I believe and since then it has gone 📈
Ryan C.'s avatar
Yes correct!
Jon Gall's avatar
You raise a great point on funds not being able to participate even if they wanted to, I never really considered that. Good work!
Nathan Worden's avatar
Yeah 😁 I'm always trying to find ways to get an advantage over the professionals haha
John Whipple's avatar
love this framing @nathanworden seems like a really smart approach!
Josh Worden's avatar
I always knew I loved not being a billionaire and this is why! But actually this is helpful, and I love the emphasis on how we can take advantage of our relative insignificance. Every limitation is an opportunity!
Nathan Worden's avatar
That's the spirit! 😆
Jason Alexander's avatar
Sounds like Ark will eventually be caught between a rock and a hard place. I wonder if the play is to invest in the companies they do and not in Ark directly. I say this after having just bought my first shares of ARKK. 😂
Nathan Worden's avatar
Yeah there's a lot of research that has been done around the size of a fund and how the larger the funds get, the lower returns are. This is likely do to the fact that larger funds can't invest in small, high growth companies.

To combat this, some of the best performing funds ever (Like Peter Lynch's Magellan Fund) were closed to new investors. The way to not get too big, is to not accept more money!
Ambrose's avatar
My bold prediction, BNGO will reach 10b market cap by end of year. It should be big enough to get invested by ARK if they don't sleep on it.
Nathan Worden's avatar
Yeah, it feels kind of crazy to say it, but what if Ark was just waiting for it to get bigger to invest in it?