Capitalize On Cloud Without A Full Commitment With This ARK ETF

It's a feather in any exchange-traded fund's cap to devote almost 18% of its combined weight to Square SQ and Tesla TSLA and have among the largest weights to two of 2020's best-performing stocks.

What Happened: That trait is sure to get some eyeballs on a fund and it would be enough for investors to not investigate any further, being sold on those large allocations to two story stocks. However, the ARK Next Generation Internet ETF ARKW has more of its own story to pen and those chapters don't revolve around Square and Tesla.

Up almost 80% this year, ARKW is rapidly becoming a darling among actively managed equity-based ETF by focusing companies that are “shifting the bases of technology infrastructure to the cloud, enabling mobile, new and local services, such as companies that rely on or benefit from the increased use of shared technology, infrastructure and services, internet-based products and services, new payment methods, big data, the internet of things, and social distribution and media,” according to ARK.

Why It's Important: Focusing on ARKW's enterprise software exposure for a moment, it's not a stretch to say plenty of investors got the memo that cloud computing assets are on fire in 2020. For those wanting to participate in some of the upside offered by software-as-a-service plays without the all-in commitment of a dedicated cloud ETF, ARKW is a fund that makes plenty of sense.

“In the past few years, the number of enterprise Software-as-a-Service (SaaS) companies going public has increased significantly,” writes ARK analyst James Wang in a recent white paper. “Once a nascent and unproven way of serving and selling software, we believe SaaS has become the de-facto business model for both startups and incumbents. While not new, its addressable market and growth seems to have caught many investors by surprise.”

And if it's growth an investor prizes, ARKW would check that box with or without cloud exposure, but the fund's SaaS footprint does enhance its growth profile. As Wang points out, the enterprise software space should deliver a compound annual growth rate (CAGR) of 21% through 2030. On a CAGR basis, that's a stunning clip.

What's Next: “We believe that while consumer-focused software companies have attracted a disproportionate share of the press’s time and attention, the large number of early stage opportunities in enterprise software seems to be more fertile ground for potential growth,” writes Wang.

Notably, plenty of ARKW components that are aren't cloud stocks are highly dependent on SaaS. That includes Square, Tesla and multiple e-commerce and streaming entertainment positions.

Bottom line: it's not surprising investors added $830.53 million to ARKW this year.