Is ARKK an ETF to Own for the Next Decade?

Last year’s ETF standout performer was ARK Innovation ETF (ARKK) an exchange-traded fund focused on disruptive innovation.
Investors took notice of ARKK’s astounding annual return in 2020. But what about now? Is ARKK fizzling with a lower price per share, or is now the time to buy and hold?

ARKK Is A Rare Actively Managed ETF

Exchange-Traded Funds, or ETFs, are essentially bundles of securities that are sold under one ticker symbol. For example, SPY provides exposure to all the companies in the S&P 500.
What makes ETFs unique is their structure. An ETF can focus on a sector, track a particular investment strategy, or focus on a particular commodity.
Investors flock to ETFs for their long-term prospects, more so than their short-term gain. ETFs are generally managed passively though Cathie Wood at ARK Invest has put an ETF wrapper around her active management strategy, a rarity in the ETF world.

ARKK Pros & Cons

Gutsy investors with a taste for risk, are holding on to ARK Innovation ETF even after its price has struggled to gain traction.

Short-term focused traders will be repelled by negative price action. But for longer term investors, ARKK has been in a long-term uptrend. The same largely holds true for some of ARKK’s largest holdings.

ARKK’s top five holdings are in Tesla (TSLA), Teledoc Health (TDOC), Roku (ROKU), Unity Software (U), and Coinbase Global, Inc. (COIN). These five companies represent 30 percent of the fund. All but one, Teladoc (TDOC), have been trending up in the medium to long term. In all, ARKK holds interests in 45 businesses it believes are disruptive.

Between February and July of 2021, many holders dumped their shares of ARKK. But those outflows began to dramatically slow down in mid-summer. Those with decade long horizons versus day-to-day outlooks view ARKK as being in a consolidation phase.

Consolidations are often followed by break-outs, so ARKK’s upside looks promising. Buying ARKK while its share price has taken a hit offers significant upside potential for long-term holders. However, the volatility of the underlying holdings means significant turbulence could be experience in the short to medium term.

ARKK Expense Ratio

ARK Invest currently has $20.45B in assets.

The ARKK expense ratio is pegged at 0.75 percent which is higher than average. But, that doesn’t necessarily mean it’s too high.

ETFs tend to have slightly lower expense ratios than mutual funds and a passively managed ETF will generally have lower expense ratios than an actively managed one, like ARKK. In general, an expense ratio above 1.5% is considered excessive.

ARKK’s Management

ARKK is an actively managed ETF, meaning that an individual or a team manages the fund’s portfolio.

While only a few ETFs are actively managed, the track record of funds using this approach is more variable than those of passive ETFs.

If the manager times the market well the actively managed fund can perform better than the market while a poor manager will suffer the consequences of mis-reading the market.

ARKK’s Track Record

Like many ETFs, ARKK has a volatile history. In its first year on the market, 2015, it earned a modest 3.76 percent.

The next year was down -1.96 percent. But then it soared higher by 87.38 percent in 2017.

The next year showed only modest growth again of 3.58 percent. But, in 2020, an annus horribilis for its many crises, ARKK soared to 152.52 percent. That kind of phenomenal return is unusual so a downward trend to a more reasonable gain in 2021 shouldn’t overly concern investors.

About Cathie Wood, Visionary Investor and Founder of Ark Invest

Cathie Wood founded ARK Invest Management LLC, also known as ARK Invest, in 2014. Wood is a veteran investor–some say a visionary- who focuses on innovation and market disruption.

Today, ARK provides investment management services throughout North America, Europe, Australia, and Asia.

ARK’s focus is solely on innovation such as DNA sequencing, blockchain technology, robotics, 3-D printing, and automation.

Wood firmly believes in “investing in the future today.” She also believes disruptive technologies will change not only everyday life but the nature of business in the near future.

Mentored by the economist Arthur Laffer, Wood first went to work as an assistant economist at Capital Group, later moving to New York City to work at Jennison Associates.

In 1991, she co-founded Tupelo Capital Management, along with Lulu Chow Wang. Wood then joined Alliance Bernstein in 2001, leaving in 2014, after her idea to create a disruption-based ETF  was deemed too risky by the firm.

Wood ardently supported the re-election of Donald Trump in 2020 because of his support of deregulation. She is friends with Elon Musk and is a devout Christian. In fact, she got the idea for the name of ARK Invest after reading about the Ark of the Covenant in her Bible. Wood is active on Twitter and Reddit where she frequently posts ARK investment and sector research.

ARK Invest offers a number of other ETFs: ARK Autonomous Tech. & Robotics ETF (ARKQ); ARK Next Generation Internet ETF (ARKW); ARK Genomic Revolution ETF (ARKG); ARK Fintech Innovation ETF (ARKF); and ARK Space Exploration & Innovation ETF (ARKX).

The firm also has exposure to several index funds, including PRNT, the 3D Printing ETF, ARK Israel Innovative Technology ETF (IZRL), and ARK Transparency ETF (CTRU). All are aligned with her thesis on disruptive innovation, all are Cathie Wood’s ideas, but none are as buzz-worthy as the flagship AARK.

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