It’s a common argument that you hear, and is supported by numerous studies: Index funds generally beat actively managed portfolios due to their lower fees and trading, whereas the stock-picking crowd swoops in and out of stocks in huge amounts, and demands the price of a king’s ransom to their claimed expertise. I’ve just discovered an amazing analysis of this phenomenon due to the current crisis in high-fliers of the tech industry. Despite all of the admiration for the team’s abilities in identifying tomorrow’s leaders in the field of “disruptive technological innovation” this ARK Invest company’s flagship, which was founded by the founder, has fallen behind plain vanilla Nasdaq 100 index fund in the last four years. These robo-run funds don’t place bets on specific names in any way and instead keep all Nasdaq stocks in a more than or less proportionally to their market cap in proportion to the the 100 members.Cathie Wood’s ETF ARK Innovation.
My diversification bet on the most profitable tech stocks ended up backfiring. I purchased a new investment in Cathie Wood’s top exchange-traded fund called the the ARK Innovation ETF ( ARKK -0.18 percent), back in February. At time, I believed it was a good idea to get a diversified exposure to high-growth stocks I didn’t wish to take on with full positions in.
Unfortunately, I purchased the ETF close to its record highs The ETF is currently trading at around 30% below the cost of purchase. I’m not worried over the loss of ARK since the ETF just makes up 1.6 percent of my portfolio. I’m also not keen on adding more shares for five reasons.
i. The majority of ARK Innovation’s top holdings trade together
ETFs that track the major indexes, like those that track major indexes, such as the Vanguard S&P 500 ETF ( VOO -1.52%)), provide instant diversification across a variety of industries. However this ARK Innovation ETF mainly invests in tech companies with high growth and many of them are insolvent and have flimsy valuations.Cathie Wood’s ETF ARK Innovation.This means that the majority of the top holdings of the ETF change direction at the same time, this doesn’t make it any more safe than individual stocks. This also ruins my plans to invest in the ETF because of it’s “diverse” range of high-growth stocks.
ii. The market’s rotation is taking a toll on ARK Innovation
The ARK Innovation ETF soared nearly 150% last year when investors turned to tech stocks in the midst of the epidemic. A new generation of investors who are retail, helped by platforms for trading that are free like Robinhood and Robinhood, boosted those gains. Many of them adored the top holdings of ARK Innovation including Tesla, Teladoc, Roku, Square, and Shopify.
However, a lot of these stocks have performed below those of the S&P 500 this year as rising bond yields as well as inflation-related fears and the focus on opening up plays have caused a change of growing to quality stocks. The trend will likely continue into the future and may keep ARK’s top stocks from outperforming the market.
iii. Trading the stable growth stocks with speculative ones
While the ARK Innovation ETF floundered, it put its stocks that were more stable such as Apple, NVIDIA, and Baidu — and purchased more speculative ones like Palantir, Coinbase (COIN 4.12 percent) along with Skillz (SKLZ -4.67 percentage).
This is a troubling trend as it indicates that ARK is trying to duplicate its prior gains by trying to chase expansion and hype at any cost. I wouldn’t recommend shares like Coinbase and Skillz because of their obvious shortcomings: Coinbase is essentially an all-in bet on cryptocurrency, while Skillz is not yet profitable and is largely dependent on only two game developers.
iv. It’s easy to purchase the winners of ARK while staying clear of its losers
I can see why the ETFs of ARK might be appealing to investors who aren’t familiar with the market. They give investors the opportunity to invest in a broad range of companies with the potential for disruptive growth The fund just requires a handful of winners to compensate for its losers.
As someone who tracks the market on a daily basis I could have use ARK’s portfolio as a basis for new investment ideas. If I’d done this, I would probably have purchased more shares of promising companies such as Shopify or Square and stayed clear of holdings in speculative companies such as Coinbase or Skillz.
v. The management costs
Since it is an actively-managed ETF, ARK Innovation charges more fees than passively managed ETFs that simply follow the indexes of their predecessors. ARK Innovation charges an expense ratio of 0.75 percent. Vanguard’s S&P 500 ETF comes with an expense percentage of 0.03 percent.
The QQQ ETF of Invesco (QQQ -1.70 0.70 percent) is a well-known fund that has a wide portfolio of top tech companies such as Apple, Amazon, and Microsoft is charged an expense rate of 0.2 percent. This is what ARK Innovation fared against those two ETFs during the year.
ARK Innovation might eventually recover however, it may be unable to justify its higher costs if the current decline persists. It’s therefore not surprising that the fund suffered record-breaking redemptions in the past few months.
The road ahead
I’m not planning to sell the ARK Innovation shares anytime soon however, I don’t expect to reduce the price by adding more shares. At the moment, I believe it’s best to choose your own growth stocks rather than seeking to create a large web over all of the top names on the market using this expensive ETF.Should you put your money into ARK ETF Trust ARK Innovation ETF right now?Before you decide to invest in ARK ETF Trust before you look into ARK ETF Trust ARK the Innovation ETF you’ll need to know this.
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