ARK Invest has had a wildly successful run with its ETFs, gathering $38.4 billion in assets under management and claiming the No. 11 spot among the largest ETF brands. This is especially impressive given the firm only offers eight ETFs. Of the brands that rank above them, Schwab (at No. 5) has the next-smallest lineup, at 26 ETFs.
The ARK Innovation ETF (ARKK) is by far the issuer’s largest ETF by assets, currently standing at $19.7 billion.
The fund launched in October 2014 and did fairly well in terms of assert gathering starting in 2017. However, it wasn’t until 2020 that the fund attracted serious attention, garnering nearly $9.5 billion in net flows—a stunning amount for a boutique issuer focused on old-school stock picking (though with a focus on decidedly “new school” stocks).
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This attention was due to ARKK’s jaw-dropping outperformance of passive broad market ETFs. ARKK returned 152.7% for the year, relative to just 18.3% for the SPDR S&P 500 ETF Trust (SPY).
Even the tech-heavy Invesco QQQ Trust (QQQ), which was up 48.6% for the year, couldn’t keep up with ARKK’s active, high-conviction strategy.
Shifting Seas For ARKK
Performance this year has been a different story. While equity markets are having another strong year, with double-digit gains, ARKK is down 7.0% for the year.
And though the fund has positive net flows of $5.6 billion for the year, outflows have picked up over the course of the year. ARKK has lost $2 billion since the beginning of July.
Smoother Seas For ARK Alternatives
Part of the reason for this exodus could be that other ETFs specifically targeting next-generation or disruptive technologies are performing much better this year.
The iShares Exponential Technologies ETF (XT) has been around nearly as long as ARKK, launching in March 2015. The fund tracks an equal-weighted index that provides exposure to firms involved in areas such as nanotechnology, robotics, 3D printing and bioinformatics.
The fund has returned 11.5% so far this year, steadily rising throughout the year even as ARKK plummeted.
In comparison to ARKK, XT is cheaper, with an expense ratio of 0.47% versus 0.75% for the actively managed fund. XT is also more broadly diversified, with 194 holdings compared to just 46 for ARKK. And these holdings tend to have lower valuations, be of higher quality and be less volatile.
Chart courtesy of FactSet
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Tomorrow’s Tech Leaders
Another fund that has outperformed ARKK this year is the Invesco NASDAQ Next Gen 100 ETF (QQQJ). This fund tracks a cap-weighted index of 100 nonfinancial stocks that are next-eligible for inclusion in the Nasdaq-100 Index.
In other words, holdings within this ETF could potentially grow to be held within QQQ one day. Though these stocks are not currently held within the Nasdaq-100, many of the names in the top 10 are still household names.
Chart courtesy of FactSet
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This fund offers exposure to these next-generation tech names for only 0.15%, meaning it’s only one-fifth the price of ARKK. And along with its cheaper expense ratio, the fund has gained 10.5% this year, outperforming ARKK by 17.7%.
Different Take On Disruption
The SPDR S&P Kensho New Economies Composite ETF (KOMP) offers exposure to companies with products or services that disrupt traditional industries. The underlying index is a composite of various other indices that are constructed around themes such as autonomous vehicles, genetic engineering and nanotechnology.
This fund is also cheaper than ARKK, ringing up at 0.20%. The fund has significantly more holdings than any of the other three ETFs, offering exposure to 491 names.
KOMP has gained 10.0% for the year, with the top contributor to performance being Upstart Holdings. Upstart, an AI lending platform, has seen an 831.7% increase in its stock price this year alone.
Active Management Takes Time
The one difference that ARKK has relative to any of these other ETFs is that it is actively managed, meaning the composition of the portfolio is at ARK’s discretion rather than being decided by an index provider.
While the industry is mixed regarding whether active management is capable of adding value, an active manager’s performance is best assessed over a full market cycle. This means that year-to-date performance is likely not a long enough time frame to declare ARKK dead in the water.
Over a longer time frame, ARKK sails past its competitors with ease.
Time will tell whether ARKK will sink or swim. But for now, the fund is navigating choppy waters until it can right the ship.
Contact Jessica Ferringer at [email protected] or follow her on Twitter
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