Is Ark Innovation ETF A Buy?

Is Ark Innovation ETF A Buy? Dozens of industries are stuck in a rut, doing business with the same tools and techniques they have relied on for decades. The digital revolution – and the integration of Artificial Intelligence (AI), Virtual Reality (VR), Augmented Reality (AR), and Machine Learning – are challenging the status quo. 

Innovative entrepreneurs are launching new technology designed to disrupt business-as-usual. And it’s working – industries ranging from financial services to education are changing rapidly. They are becoming smarter, more personalized, and more accessible to a wider population. 

Dozens of innovators bring new tools to the table every year, though only a small percentage see large-scale adoption and dramatic financial success. However, those that do tend to reward early investors with returns far beyond anything solid, reliable blue-chip companies offer. 

Consider some of the biggest companies in the world today – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (GOOG). All disrupted their respective industries, and made their investors millions – even billions – along the way. Which companies will be the next disruptors? 

Catherine Wood, a New York investor with a special affinity for innovation, thinks she knows. She is putting her money behind her bold predictions with the Ark Innovation ETF – a managed fund that focuses on the technologies of the future. Is she right? Is Ark innovation ETF a buy? 

Ark Innovation ETF: What Is It?

Exchange Traded Funds or ETFs have a lot in common with mutual funds. Both invest in a collection of assets which gives investors instant diversification in every share.

ETFs tend to have lower minimum investments than mutual funds, and they trade throughout the day rather than at the close of business.

Many ETFs track specific indexes, so they require very little management. That tends to keep expenses quite low. 

Ark Invest has a menu of actively-managed ETFs, including Ark Genomic Revolution ETF, Ark Innovation ETF, Ark Next Generation Internet ETF, Ark Fintech Innovation ETF, and Ark Autonomous Technology & Robotics ETF. They are attracting a lot of attention, because in the past year, all five have doubled their returns. 

Ark Innovation ETF has a goal of growing capital over the long-term. At least 65 percent of its assets are invested in shares of companies that can be categorized as “disruptive innovators”.

Both domestic and foreign companies are considered in making investment decisions, and foreign investments may be made in developed or emerging markets.

Ark Invests In Disruptive Innovation

While there is occasional debate about which companies qualify under the disruptive innovation heading, the term is typically defined this way: Disruptive innovation is a new tool, technology, or method that is likely to establish new markets and value networks.

As it does so, the traditional market and value network is “disrupted” – existing companies that have long been industry leaders are displaced in favor of the disruptor.

For example, in late January, Ark Innovation ETF made significant purchases of Opendoor Technologies (OPEN), Pinterest (PINS), and Skillz (SKLZ).

Opendoor, a company backed by billionaire investor Chamath Palihapitiya‘s Social Capital, is focused on disrupting the real estate market. The plan is to turn the long and painful process of buying and selling homes into a fast, convenient, and almost entirely online experience. 

Pinterest isn’t an especially new addition to the world of social media, but it sets itself apart by avoiding most of the negativity that plagues major players like Facebook (FB) and Twitter (TWTR). So far, it hasn’t been able to generate substantial profits, but a new strategy to boost revenue has Ark Innovation interested. 

Skillz (SKLZ) is going after the massive esports gaming market by offering a unique mobile game platform. It has already attracted a solid list of mobile game developers, and it is now focused on increasing users.

Today, it has roughly one out of every 1,000 players, so there is opportunity for exponential growth. Ark Innovation ETF is convinced that even a small rise in members will deliver impressive returns for shareholders. 

ARKK Holdings

To date, Ark Invest leader Catherine Wood has had an almost prescient ability to pick winners in innovation. She predicted Tesla’s 2020 rise and bought in through Ark Innovation ETF, which is one of the factors that contributed to the ETF’s strong 2020 results. 

Top holdings include Roku (ROKU), the basic platform from which streaming services reach consumers, along with CRISPR Therapeutics – a leader in gene-editing.

ARKK holdings also include Invitae (NVTA), which is deep into work on gene-testing. Wood elected to add Square (SQ) to Ark Innovation ETF’s holdings due to its success in completely transforming merchant services and digital payment solutions.

The top ten list is rounded out with Teladoc Health, Zillow Group, Baidu, Spotify, and Proto Labs

ARKK Expense Ratio

Ark Innovation ETF launched on October 31, 2014. Today, net assets are at $17.68 billion, and the expense ratio comes in at 0.75 percent.

While Ark Innovation’s returns weren’t especially noteworthy in early days, disruptive innovation stocks have soared over the past year.

Ark Innovation’s performance demonstrates that fact: 

  • One Month – 12.6 percent 
  • Three Months – 37.55 percent
  • One Year – 152.83 percent 
  • Three Years – 52.34 percent 
  • Five Years – 46.03 percent
  • Since Inception – 36.42 percent

These figures are calculated as of December 31, 2020. 

Is ARKK A Good Investment? The Bottom Line 

Every investment carries risk, but some are less risky than others. For example, established blue chip companies tend to provide reliable returns, though they rarely shock shareholders with sudden increases in revenue and profitability. 

Innovators, entrepreneurs, and startups are on the higher end of the risk spectrum. By definition, they are attempting something new, and there is no guarantee of success. Of course, when they do succeed, those who were willing to take on the risk of failure are rewarded with returns far beyond the market average. 

ETFs in general – and the Ark Innovation ETF in particular – are a smart way to gain exposure to innovative, disruptive companies with less risk than individual shareholders face.

ETF shares include a mix of assets, so one company’s failure doesn’t mean complete loss of capital. That feature makes ARKK a good investment for anyone who wants a piece of “the next big thing”. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.