Talk Your Book: Investing in Moonshots

Episode Summary

Executive Summary: The episode examines Direction’s Moonshot Innovators ETF, a small/micro-cap innovation strategy launched in November 2020 that has already gathered nearly $200 million and delivered explosive early returns. The hosts and Dave Mazza discuss how the fund screens for innovation using NLP on SEC filings plus R&D intensity, why it differs from ARKK, how it’s designed to be volatile, and why it may complement core index holdings rather than replace them.

Main Topics: Market pullback in growth stocks (Priority: 5/5): The hosts open by noting a broader sell-off in growth names and frame it as a healthy correction rather than the start of a major bear market, especially after a sharp run-up in innovative stocks. What the Moonshot Innovators ETF is (Priority: 5/5): Dave Mazza explains the ETF as a systematic small-/micro-cap innovation fund focused on early-stage disruptive companies rather than household-name growth stocks. Innovation scoring methodology (Priority: 5/5): The fund’s selection process blends qualitative and quantitative inputs: NLP scans of SEC filings for innovation language relative to peers, plus R&D spending relative to sales. Why the fund has performed well (Priority: 4/5): Performance is attributed to both favorable market conditions for innovation and the portfolio’s exposure to underfollowed companies benefiting from long-term trends accelerated by COVID. Portfolio construction and rebalancing (Priority: 4/5): The ETF uses modified equal weighting, excludes companies once they move beyond the small/mid-cap range, and periodically sells winners that become too large to stay aligned with the mandate. Using thematic ETFs as complements (Priority: 4/5): Mazza argues thematic investing is the new active investing and should be used as a satellite allocation alongside low-cost core index funds. Liquidity, capacity, and volatility (Priority: 5/5): The discussion emphasizes that ETF liquidity is not just trading volume, that the fund can likely handle significant assets, and that investors should expect substantial volatility.

Key Arguments: The recent decline in growth stocks is a normal and healthy correction after a strong rally, not necessarily the end of the trend. Moonshot Innovators is intentionally built to own early-stage innovators before they become large-cap household names. Innovation is measured by both what companies say in filings and how much they actually invest in R&D versus peers. The ETF is designed to sell winners as they graduate into larger-cap territory and rotate into the next set of emerging innovators. The strategy is distinct from ARKK because it emphasizes smaller, less recognizable companies and a rules-based process rather than mostly well-known names. COVID-19 accelerated long-term trends in cloud, cybersecurity, remote work, biotech, and connected infrastructure, helping these names. The fund is meant as a complement allocation—roughly 5% to 10% of a portfolio—rather than a core holding. ETF assets and trading volume are not the same as liquidity; creation/redemption and underlying basket liquidity matter more. Rising rates generally pressure growth stocks, but the portfolio’s unique composition may make it less directly tied to large-cap growth factors. Thematic investing is presented as a modern form of active management and a more precise way to target industry disruption than traditional sector rotation.

Data Points: Launch date: November 2020 - The ETF debuted in late 2020 and was discussed after only a few months of trading. Assets under management: Almost $200 million - Mazza described the fund as having raised nearly $200 million organically in a short period. Performance since launch: Up 93% - Hosts cited the Direction Moonshot Innovators ETF’s gain since November 2020. S&P 500 performance since launch: Up 10% - Used as a benchmark for comparing the fund’s launch-period performance. ARKK performance since launch: Up 59% - Mentioned as a rough thematic-growth comparator. Portfolio size: 50 companies - The ETF holds 50 names deemed to have the highest early-stage composite innovation scores. U.S. exposure: 80% - Most holdings are in the United States, with some exposure to Israel. Genetic engineering theme weight: 19% - One of the largest stated sub-themes in the portfolio. Cybersecurity theme weight: 17% - A major portfolio theme, tied to cloud adoption and remote work. Expected EPS growth: Well north of 25% - Average estimates cited for the basket, with the caveat of limited analyst coverage. Reconstitution/rebalance frequency: Twice a year; annual reconstitution in December - Mazza explained the cadence for refreshing holdings and finding new names. Market-cap exclusion threshold: Above S&P 400 mid-cap range - Companies graduating beyond mid-cap territory are removed to keep the fund focused on small/micro caps. Example of a graduated holding: NEO was sold after becoming a $50 billion market-cap company - Illustrates the rule-based exit from winners that outgrow the strategy. Portfolio allocation suggestion: 5% to 10% - Suggested as a complement position within a broader portfolio.

Pivotal Quotes: "This is definitely a complement position." — Dave Mazza: On how investors should use the ETF in a broader portfolio, rather than as a core holding. "Thematic investing is the new active investing." — Dave Mazza: Mazza’s view that thematic ETFs are becoming a major way for investors to express active views systematically. "It’s like a micro cap growth fund." — Hosts: Early in the conversation, they frame the ETF’s risk profile and style for listeners.

Implications: The episode suggests investors can use thematic ETFs to access early-stage innovation systematically, but only as a high-volatility satellite allocation. It also signals continued demand for rules-based innovation strategies even amid rate-sensitive growth selloffs.