ARKK – Risk Not Equal Reward (NYSEARCA:ARKK)

ARK Innovation ETF (NYSEARCA: ARCH) exists since 2014. I did not know concerning the fund till Kathy Wooden, CEO and CIO of Ark Make investments, began showing on CNBC touting her fund’s efficiency.

How as you possibly can see beneath, ARKK’s efficiency was stellar within the early 2020s, however has lagged considerably lately because the ETF’s worth has fallen:

I am not as damaging about Woods and ARKK as many different analysts, however I feel traders could be higher off allocating elsewhere. Let’s get into the specifics of the ETF and I will clarify why I am towards this specific funding.

Threat doesn’t equal reward

As many know, the ARK Innovation ETF focuses on investing in “disruptive innovation.” The fund description goes on to say that the fund invests in services or products that may doubtlessly change the way in which the world works. Later I’ll speak concerning the particular areas wherein the fund likes to speculate, however I feel traders can perceive from this description that these kind of investments are excessive danger. Public corporations that ARKK invests in have the “potential” to vary the world, but in addition have a better chance of failure.

If you happen to allocate funds to a riskier asset, you count on a better reward.

If you happen to can examine ARRK’s efficiency to what I’d name much less dangerous ETFs, such because the Vanguard S&P 500 ETF ( VOO ) and the Invesco QQQ Belief ( QQQ ), you will see that ARKK would not outperform:

Additionally, if you happen to check out the Looking for Alpha Threat Score and associated metrics, you will see that the Wooden ETF is rated an “F”:

One in every of these metrics that I wish to focus on in additional element is turnover. ARKK at the moment has a turnover fee of 26%, which is near the typical for all ETFs. Whenever you examine ARKK to the opposite two ETFs I listed above, ARK is greater than QQQ, which has a turnover fee of about 22%, and quite a bit greater than VOO, which has a turnover fee of two%.

As a long-term investor, I want to personal ETFs with decrease turnover. Legendary investor Terry Smith of Fundsmith said in his e book Investing for Progress that considered one of his ten golden guidelines of investing is to commerce as little as doable. Though Smith’s writing predates Robinhood (HOOD) and commission-free buying and selling, I nonetheless consider that Smith’s rule holds grudges (Smith nonetheless adheres to this rule from what I’ve found, because the turnover proportion of his fund is 10%). For my part, decrease turnover is because of larger conviction within the firm and higher due diligence. I perceive that unexpected points could come up that may change the outline of the funding thesis, comparable to adjustments in administration, macroeconomic situations or new competitors out there. Nonetheless, it seems that Wooden and her workforce are making some unusual strikes that decision into query the muse’s decision-making.

For instance, just a few years in the past Wooden added Nvidia (NVDA), which I’d undoubtedly name a “disruptive innovation” firm, to her fund. Nonetheless, on account of a scarcity of conviction, she bought early and missed out on an enormous potential revenue.

In one other instance of questionable logic, Wooden purchased a big stake in considered one of its prime holdings, Uipath ( PATH ), a day earlier than the corporate reported Q1 2025 earnings. The following day, the inventory plummeted when the corporate’s CEO resigned. Clearly, Wooden was seemingly unaware of the resignation, however the timing of the inventory buy appears questionable.

As said on the ARK Make investments web site, the goal is for an annual turnover of 15%, however Wooden and her workforce are clearly making extra adjustments to the fund. This calls into query the fund’s evaluation and filtering course of coupled with the fund’s decision-making. I’ve solely shared two examples of Wooden’s latest work, however by working a easy Google search or a Looking for Alpha search, traders can discover many extra examples of some mind-boggling options.

Fund construction

As talked about above, the fund focuses on breakthrough innovation and emphasizes a number of key areas. These areas embrace genomics and DNA expertise, monetary expertise, robotics, automation and synthetic intelligence.

As of Could 29, the fund’s prime ten holdings are as follows:

ARKK at the moment has 38 holdings, and as you possibly can see within the chart beneath, the holdings are unfold pretty evenly throughout 5 sectors:

I feel it’s extremely seemingly that a number of of those 38 holdings will likely be huge winners. My downside, nevertheless, is that I am undecided if Wooden and her workforce have the persistence or conviction to carry on to this winner given the fund’s turnover fee and up to date efficiency. As an alternative of investing in ARKK, I’d do it as an investor.

Capturing Strategy

As one other analyst put it, Wooden is utilizing the “shotgun” to attempt to hit as many of those damaging areas as doable. I agree that that is what ARKK is making an attempt to realize, however it hasn’t been working in the previous few years.

If traders need a comparable strategy, there are two particular ETFs that I feel are higher fitted to traders in comparison with ARKK: the Vanguard S&P 500 ETF ( VOO ) and the Invesco QQQ Belief ( QQQ ).

QQQ is a good various for risk-averse traders, however as you possibly can see from the chance metrics on Looking for Alpha, it is a barely safer funding with a “C+” ranking:

I feel QQQ can provide traders a possibility to put money into most of the disruptive funding classes that ARKK can also be doing, comparable to synthetic intelligence, robotics, fintech and automation.

Beneath are the highest ten holdings for QQQ as of Could 30:

Regardless of their giant capitalization, I nonetheless consider that many of those corporations, comparable to Nvidia ( NVDA ) and Microsoft ( MSFT ), will likely be leaders in classes comparable to synthetic intelligence.

One disadvantage of QQQ is that it is rather technological, as you possibly can see beneath:

My private favourite ETF to put money into is VOO. As you possibly can see from Looking for Alpha’s danger metrics, it’s a a lot safer various in comparison with QQQ and particularly in comparison with ARKK:

Additionally, whereas VOO remains to be round 30% of tech, it is rather more various in comparison with QQQ:

In the case of my investing type, I like to speculate most of my capital in investments which might be much less liable to danger, which makes VOO a fantastic alternative. Because the above indicators present, this can be a much less dangerous ETF in comparison with ARKK, nevertheless, this ETF provides greater returns to traders. Additionally, in comparison with QQQ, I like that VOO is much less technological.

Bitcoin and Particular Thematic Funding ETFs

Wooden is a Bitcoin bull and so I consider a few of her investments are Bitcoin proxy performs, Coinbase is an apparent proxy and so are Block (SQ) and Robinhood (HOOD) to some extent. As an alternative of shopping for proxies, I’d simply purchase bitcoin itself if you happen to consider on this asset. I’ve a small portion of my private capital allotted to Bitcoin.

I feel some classes are tougher to put money into. Personally, I feel genomics and DNA expertise is a very difficult matter to put money into, on condition that it is exhausting to inform which firm will likely be profitable in these early days. I feel the Ark Genomic Revolution ETF ( ARKG ) is pretty much as good as any ETF in terms of investing on this specific space.

As well as, Ark Make investments has a number of different extra particular thematic ETFs, such because the ARK Autonomous Expertise and Robotics (ARKQ) and the ARK Fintech Innovation ETF (ARKF). These will be good alternatives for traders who need to put money into a specific space. Nonetheless, I am extra inclined to purchase VOO or QQQ as a substitute of considered one of these particularly themed ETFs.

Conclusion

The ARKK ETF is designed for high-risk, high-reward traders, and the rewards have not been there just lately.

I feel Voodoo and the Ark workforce appear to lack conviction and are struggling to determine “destroyers” price conserving round for a big period of time.

I feel there are higher funds than ARKK, comparable to QQQ for traders who need to tackle extra danger, or VOO for these on the lookout for much less danger and extra diversification.

Traders want to find out their danger tolerance and discover a particular funding or investments that permit that investor to sleep soundly at evening.

As for me, I plan to stay with a extra assured guess on VOO, put money into just a few high-quality founder-led corporations, and allocate a small proportion of capital to Bitcoin.