Do You Buy This Sinking Ship?

Triple-digit yearly returns are pretty insane for stocks. But it’s virtually unheard of for ETFs. 

However, Cathie Wood, CEO of Ark Investment Management, had five actively managed ETFs that did just that. 

The Ark Innovation ETF (ARKK) is the largest, and most well-known among investors. 

In 2020 it returned an astounding 156%.

Of course, if you have been following the ETF, it has since struggled. In 2021 it lost 23%. It’s been a horror show in 2022, declining by more than 50% at one point during the year. 

So why on earth would financial pros be interested in this ETF?

It’s not just popular, they look up this ticker 500% more often than any other actively managed ETF.

Is it like when you rubber-neck from your car when you pass an accident? Or are people genuinely interested and think there’s some hidden value underneath the carnage?

In a few moments, we’ll pop the hood and take a look at what ARKK is about, and whether or not it makes for a viable investment. 

The Ark Innovation ETF (ARKK)

What makes ARKK different from a lot of other ETFs is that it’s actively managed. In other words, it is constantly weaving in and out of positions, putting on new ones, and getting out of old ones. 

The focus of the fund is on finding companies with “disruptive innovation” that have the potential to change the world around us. 

One of the biggest hits ARKK had was buying shares of Tesla (TSLA) before it was popular, and riding that wave up. 

But while everyone was chasing growth and innovation in 2020, that stopped in 2022 because of the fears of inflation getting out of hand and interest rates rising. 

Investors are more interested in companies making revenues and not being hampered by debt. 

Incredibly, the top 10 holdings make up more than half the total holdings by weight, leaving the ETF with excess exposure to just a few companies.

If you’re an investor seeking diversification then this is clearly not the ETF for you. However, if you want some exposure to tech, you may use this fund because it invests in a basket of high-growth tech stocks. 

And these stocks aren’t doing well.

The ETF’s top holdings have been punished because of their lack of profitability. 

For example (TDOC )is down -60%, (ROKU) -55%, and (ZM )-45% are all down significantly this year. 

How can professionally managed funds hold onto positions that go so much against them?

Well, according to Woods, she has a multi-year horizon on these stocks. She believes that their technology and innovation will eventually lead them to profitability, and is not necessarily considered with quarterly results. 

Ohh, and she thinks deflation, driven by technological improvements, is a bigger concern.

The $12B had its biggest inflow of the year last Tuesday when it pulled $366.7M. Unfortunately, two days later, it suffered its 3rd largest drop in its history, falling 9.5%. 

Expensive To Own & Risky

The expense ratio for ARKK is .75% which is significantly higher than the asset class median of .29%

ARKK is one of the most volatile ETFs. As mentioned it is down nearly 50% while  the asset class median is -14.5%

However, that hasn’t stopped investors from continuing to support the ETF, as it has no problem with inflows. 

Our Opinion – 6/10

ARKK shares have been devastated in 2022. However, at these levels, we believe a bounce will and should happen. And it will be violent.

But if you want to play it safe and want a more diversified basket of tech stocks then we suggest the S&P Select Shares Tech ETF (XLK) instead. 

Key Point: There is a lot of overlap between the top holdings of ARKK and the Nasdaq 100 QQQ ETF. If you have both in your portfolio, make sure you measure how much of your risk is concentrated into specific stocks like Tesla.