2020 was a good year for the tech industry. Many high-growth tech stocks put up stellar performances that made investing in technology one of the biggest trends for stock market investors.
2021 presented a different picture for the tech industry as most high-growth stocks went through significant corrections.
Many investors who missed out on the gains and are bullish about the tech sector’s growth in the coming years may have an opportunity to buy on the dip.
Investing in an ETF that tracks the performance of innovative and high-growth companies that rely on or develop tech-enabled solutions might seem like an attractive play for many investors, all without having to make several individual trades.
If you are interested in considering a high-risk investment for this purpose, my ARK ETF review (ARKK) will highlight a fund that you can consider.
Invest In Innovative Technology Companies
Invest in an actively managed ETF to gain exposure to a globally diversified portfolio of companies that benefit from or rely on sparking innovation in a variety of fields.
- Boasts the potential for significant long-term returns
- Does not chase beating specific market indices
- Significantly high-risk fund
- The fund manager does not have high regard for risk management
What Is ARK Innovation ETF?
ARK Innovation ETF (ARKK) is the flagship fund by ARK Investment Management.
The fund is designed to focus on companies that exhibit disruptive innovation, effectively focusing on companies that rely on or develop technologically enabled new products or services that can potentially contribute to changing the way the world works.
The fund manager’s focus has been on game-changing stocks, following a thematic approach to allocating the fund’s assets instead of aiming to beat a specific market index.
ARKK ETF focuses on success stories in various segments of the cutting-edge tech sector in areas like robotics, artificial intelligence, energy storage, blockchain technology, and DNA sequencing.
Understanding what ARKK ETF invests in requires a little background on the fund manager. ARK Investment Management was registered in 2014 with the SEC by Cathie Wood, the CEO, and CIO of the investment company.
Wood separated from the investment management firm she was working for previously to create her own company because her previous employer considered her actively-managed investment style too risky.
ARKK ETF actively invests in disruptive innovations with the potential to change how the world works, focusing on various areas in the tech sector, including:
- DNA Sequencing Technology
- Next-Generation Energy
- Internet of Things
- Internet Infrastructure and Services
- Business Automation and Manufacturing
Some of the fund’s top holdings include Tesla, Teladoc Health, and Zoom. Focusing primarily on the tech industry, the fund does diversify its asset allocation across several segments aligning with its focus on “disruptive innovation.”
This section of my ARK ETF review will discuss the fund’s sector weightings and a breakdown of its asset allocation in terms of the different tech segments it invests in.
While the fund primarily invests in tech-focused companies, it does diversify its asset allocation across several sectors of the economy through them.
The tech sector accounts for 35.59% of its asset allocation, followed by healthcare at 31.75%. Communications services come in third, accounting for 19.74% of its asset allocation.
Taking a closer look at its technology breakdown also presents a good picture of the different sub-segments ARKK ETF focuses on. Cloud Computing companies account for 13% of its asset allocation, followed by Digital Media at 11.9%, and E-Commerce at 10.9%.
This section of my ARK Innovation ETF review will discuss the top holdings for the fund.
ARKK ETF has a very narrow focus and presently invests in 44 companies. The fund is as atypical as you can expect, which shows in its asset allocation. Its top ten holdings account for over 50% of its asset allocation.
Its biggest holding is Tesla, accounting for 8.43% of its asset allocation, Teladoc Health comes in second with a 6.22% asset allocation, and Zoom Video Communications is third with a 6.10% asset allocation.
Its top ten holdings also include a music streaming company called Spotify, a cryptocurrency exchange called Coinbase, and a blockchain technology-focused company called Block Inc.
ARK Innovation ETF is an actively managed thematic fund that does not seek to replicate the performance of any market index. Instead, the fund allocates its assets to securities at the fund manager’s discretion.
The fund manager assembles the portfolio one stock at a time, using each stock’s cumulative scores based on the firm’s own scoring system as a guide to position sizing.
Accordingly, the fund’s management expense ratio is higher than most typical ETFs, and it could cost you 0.75% of your holdings annually to own the fund.
Despite the higher management expense that comes with ARKK ETF, the fund has a considerably lower cost than mutual fund products that might offer similar benefits and features in Canada. Mutual funds in Canada typically charge over 2% in fees.
This section of my ARKK ETF review will discuss the fund’s performance in the last 12 months to give you a clearer picture of how the fund has been doing and what you can potentially expect moving forward from the fund.
The graph clearly shows a steep decline in the fund’s performance in the first quarter of 2021, followed by a volatile but relatively flat sideways movement until the final quarter that saw a gradual decline that has become worse in the first few weeks of 2022.
The fund’s performance between March 2020 and February 2021 showed immense growth for the fund as the assets it holds posted significant gains.
However, it has been downhill from there, and it seems that the high-risk thematic strategy employed by the fund manager has started to backfire.
It is important to remember that past performance does not guarantee future results, and it is unclear what the future holds for the fund’s performance based on its performance since its inception so far.
ARK Investment Management is a firm that aims to deliver long-term capital appreciation by “…investing in the leaders, enablers, and beneficiaries of disruptive innovation,” according to the firm’s website.
ARK Innovation ETF (ARKK) is a very narrowly-focused fund that has gone through a significant downturn in the last 12 months of trading that exhibits the fund manager’s high-risk approach.
ARK Investment Management also features other funds, like the ARK Next Generation Internet ETF (ARKW), ARK Genomic Revolution ETF (ARKG), ARK Autonomous Tech, & Robotics ETF (ARKQ), The 3D Printing ETF (PRNT), and ARK Fintech Innovation ETF (ARKF), among several others.
Of all the funds offered by ARK Investment Management, only ARKQ ETF and PRNT ETF have had a positive movement in 2022, providing 7.88% and 9.27% year-to-date returns, respectively at writing. ARKG ETF has been the worst performer, with -31.90% year-to-date returns in the same period.
The fund’s approach to achieving high returns by investing only in companies it thinks will post significant gains in the next five years instead of aiming to beat any market index undoubtedly should be considered high risk.
Presently, I don’t feel that ARKK ETF would be the right investment for me. The portfolio has become less liquid and more susceptible to significant losses as it has grown.
The performance of the fund has deteriorated while its Assets Under Management have grown in the last 12 months, and it has increased its positions in small companies that are more challenging to sell without impacting their stock prices.
The investment firm has downplayed the fact that the fund’s downside has become alarmingly steep, primarily relying on the past as a guide to the future.
However, the past performance does not necessarily reflect on the future performance. The situation will keep changing, and the fund manager may need to resort to stronger risk-management practices.
Depending on how bullish you are about the fund manager, Cathie Wood, and your risk tolerance level, you could look at ARKK ETF as a good long-term investment. However, I do not consider the fund a viable long-term investment as things stand.
Without a team of risk management professionals who can stress-test the risk exposure for ARKK ETF’s portfolio, estimate potential losses during hypothetical and historical market environments, and prepare for worst-case scenarios, the fund does not seem poised to provide long-term success.
A central part of Cathie Wood’s process is to focus more on the riskiest holdings during uncertain operating environments, favoring retaining mostly small-cap and extremely volatile assets and selling off large-cap and liquid assets.
ARK Investment Management may have some work cut out for it to reposition the portfolio held by ARKK ETF and mitigate market-impact costs.
The fund manager’s pursuit of disruptive innovators could appeal to aggressive investors who have the stomach to bear high-risk and potentially heavy losses. If its strategy pays off, the fund could provide substantial long-term returns, but the promise of high returns comes with a significant degree of capital risk.
How To Buy ARKK ETF In Canada
The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:
|Wealthsimple Trade||Get $50 Signup Bonus|
|Questrade||Get $50 Free Stock Trades|
To learn more, check out my full breakdown of the best trading platforms in Canada here.
ARK Innovation ETF (ARKK) came along as one of the most highly anticipated actively-managed ETFs to date. The fund’s performance between March 18, 2020, and December 23, 2020, showed that the fund manager’s aggressive approach to investing can provide stellar shareholder returns.
However, maintaining such a track record is a whole different thing, and the fund is seeing the consequences of a high-risk strategy unfold.
The fund’s significant decline since February 12, 2021, shows what can happen with such a risky approach to investing.
Provided that the fund manager’s inexperienced team of analysts managing a bloated asset base can turn things around, ARKK ETF could be a good investment for long-term investors with an appetite for high-risk investments and the ability to bear massive losses.
If you are interested in investing in a disruptive sector and want hands-off exposure to cryptocurrencies, you should check out my breakdown of the best Bitcoin ETFs in Canada.
But if you are a risk-averse investor looking for relatively safer returns through dividends, you could check out my list of the best monthly dividend ETFs in Canada.