Cathie Wood, the founder of ARK Invest, has a well deserved reputation as one of Wall Street's most innovative thinkers and best stock pickers. Over the past several years, ARK's funds have often vastly outperformed the broader market. She became a household name in 2020 as her flagship ARKK Innovation fund soared to dazzling heights after the pandemic related crash in March.
The success of ARKW and ARKK funds has certainly caught my interest for exposure to tech stocks. So I wanted to take a deeper look at these two funds.
The entire ARK family of funds is built around five key themes: artificial intelligence, robotics, energy storage, DNA sequencing, and blockchain technology. Wood believes advances in these five areas will transform industries and deliver outsized growth. Two of the most popular funds are the ARKK and the ARKW Next Generation Internet funds.
In comparing the ARKK and ARKW funds, there is a lot of overlap. Both have Tesla as their largest holding, with it occupying sometimes more than 10% of each fund, depending on the day. The top 10 stocks in each fund account for roughly half of the market capitalization of each fund. Eight stocks account for the top ten in each fund. ARKK has biotech Exact Sciences and Unity Software in their top ten, while ARKW has Grayscale Bitcoin Trust and Twitter in theirs. Both Twitter and Unity Software are in each fund, however, just occupying a spot outside of the top ten holdings in the other fund. Both funds are comprised of roughly 45 individual stocks.
Both funds tend to trade in unison, as would be expected considering their similarities. But there are differences, and going forward, it’s highly likely these differences will show up in their returns. Which fund is right for your portfolio? Let’s take a deeper dive into their similarities and differances.
What’s the Same?
Some key holdings in both funds include Tesla, Roku, Coinbase, Zoom and Teladoc. Wood has been outspoken in her support for Tesla. Many consider it just an electric vehicle company, but Wood has insisted for years it is much more. And to her credit, it’s difficult to say she has not been proven right. Wood was one of the first Wall Street analysts to realize Tesla was an artificial intelligence and software company as it pursued self-driving cars.
Both funds also hold large positions in television streamer Roku and the 2020 lockdown phenomenon Zoom. Wood recognized both early and doubled down on both of them after their 2020 peaks, insisting that neither of them would be the flash in the pan that many analysts predicted.
Coinbase is also a large position in both funds. Blockchain technology is a focus of ARKW and Wood feels it is innovative enough as an early cryptocurrency pioneer for the ARKK fund.
Virtual healthcare provider Teladoc is the most interesting stock that is a key player in both funds, as it is one of the few healthcare related stocks in the ARKW fund.
What is unique about ARKK?
Compared to ARKW, there are two componenment unique to ARKK. ARKK has much more exposure to mid cap stocks, while ARKW is almost all large caps. Just as important, ARKK also has a lot of healthcare related stocks, mostly related to DNA sequencing.
The five largest holdings in ARKK that are not in ARKW are all healthcare companies. Exact Sciences, a 13 billion dollar market cap innovative cancer diagnosis and screening company, is in ARKK. Intellia Therapeutics, Crispr Therapeutics, Beam Therapeutics, and Fate Therapeutics are all mid caps in the DNA sequencing space with relatively large positions in ARKK.
What is unique about ARKW?
Key holdings exclusive to ARKW include Grayscale Bitcoin Trust as well as cloud software company Splunk, Singapore based fintech Sea Limited, online marketplace ecosystem Etsy and even Dow component Disney, due to its innovative streaming content. It is important to note that Greyscale really is not an innovative company, or a company at all, it’s just a way to wrap up bitcoin into an investment vehicle that can be traded on the NYSE. Grayscale is not a trading platform like Coinbase, but it does provide exposure to blockchain technology which is one of the the purpose of ARKW.
Which One is Right for You?
There's no doubt that ARK's ETFs have seen wild gains and have received a lot of press in recent years. However, it's important to keep in
mind that these spectacular returns do not necessarily predict future growth. Just because a fund has experienced incredible returns over the past year or two doesn't mean it must continue seeing those returns in the future.
ARK ETFs don't have a long track record, either. Cathie Wood only founded the firm in 2014, and some of the ARKW was only established within the last couple of years. So none of these funds can boast a long track record of success.
ARK's goal is to invest in the most innovative, cutting-edge companies. While those companies sometimes experience explosive growth, they're also more volatile and riskier than well-established companies. As with any risky investment, the chances for wild success are coupled with lots of risks as well.
The risk averse should probably avoid any of these funds. Could you still sleep at night if one of your positions fell by 30%? Or even 50%? Knowing how you'll handle volatile situations is crucial when deciding whether these ARK funds are right for you.
If you do choose to invest in ARK funds, it's crucial to make sure the rest of your portfolio is well diversified. We recommend a barbell strategy with your risky ARK funds on one side and some safer funds on the other side. There will definitely be times when ARK funds do not perform well, that is inevitable, and it’s important to have some safe stocks to fall back on.
With any investment, you should only invest what you can afford. This is especially important with risky investments like ARK ETFs, though. If you do choose to invest in these funds, only invest money you can afford to lose, as there are certainly going to be plenty of down markets for these cutting edge funds, even if they do end up continuing their outsized performance in the long run.
In addition, advisors are of course always asking to first consider your risk tolerance. When dealing with especially risky investments such as ARK funds, a better question to ask yourself is, “Am I getting paid appropriately for the risk I am taking?” Framing the question this way may help you realize that you do not, in fact, need to be in risky funds considering your personal values and financial situation.
These are incredibly risky investments. Try to imagine what these funds would have looked like had they existed 25 years ago. Sure they probably would have had Apple or Microsoft in 1995, but they also would have had also rans America Online and JDS Uniphase in the early 2000s. It is almost a certainty that some of the stocks in ARKW and ARKK will not even exist in the coming years. That is just the nature of investing in highly innovative cutting edge technology. Risk is in the DNA of the entrepreneurs behind these companies, and that will show up in your portfolio as well.
Finally, it's important to keep in mind that investing in the stock market is a long-term strategy. This goes for any investment, too, not just ARK ETFs. Before you invest, think about whether you'd be willing to hold these funds for several years or even decades.
ARK ETFs have certainly been the hot talk in the investing world recently. But they aren't right for everyone. If you have a clear strategy in place and a high risk tolerance, there very well may be a place for ARK funds in your portfolio. Otherwise, you may want to steer clear, as there are still many options out there that will definitely grow over the long term, without the stress of the ups and downs inherent in ARK funds.
So now that we know the significant differences and similarities, have assessed the risks, and understand the core principles behind Ark ETFs, which one is right for your portfolio? There’s really no reason to own both any more than there is a reason to wear a belt and suspenders at the same time. Even though ARKK is more diversidied as it contains stocks across all five of Ark’s themes, it is also more volatile and could suffer bigger losses due to the larger number of medium cap stocks.
Since no one is holding any of the Ark fund for their safety or nice steady dividend, we are inclined to recommend most investors first consider the ARKK Innovation fund. You get exposure to a broader range of stocks, and with the mid cap exposure, there is a greater likelihood of those outsized jaw-dropping gains Cathy Wood is known for.
If your portfolio contains holdings related to healthcare, or likely more importantly, has a larger amount of mid cap stocks, ARKW may be the better one for you.
Regardless of which one you choose, be ready for lots of ups and downs. We recommend rebalancing your portfolio quarterly to take advantage of some of the ups and downs, the same advice that goes with any investment. And most importantly, have the mindset that you are going to be in these funds for a long time, as they are certain to be volatile even though there is a high probability of them increasing in the long run.