You should know these ARK ETFs



If you hadn't heard of ARK ETFs, it's high time you start to pay close attention to them.


What are these ETFs? You might ask.


Let's start off with their performances first to give you a good overview. Here is a snapshot of the performances of the various ARK ETFs since inception.

(Source: https://ark-funds.com)


These various ETFs have returned double digits (at least 21%) annualised returns since inception. Such performances certainly make performances of the benchmark indexes such as S&P 500 and MSCI World Net Index in the same time period pale in comparison.

Now that I have your attention, let's begin to talk about these ARK ETFs in detail.


ARK ETFs are ETFs which focus on disruptive innovation in various domains such as genomic revolution, autonomous technology, fintech innovation etc. There are a total of 7 ETFs by ARK- 5 of them are actively managed while 2 of them are indexed. The 5 actively managed innovation ETFs are namely ARKK (ARK Innovation ETF), ARKQ (Autonomous Technology & Robotics ETF), ARKW (Next Generation Internet ETF), ARKG (Genomic Revolution ETF) and ARKF (Finch Innovation ETF). The two indexed innovation ETFs are namely PRNT (The 3D Printing ETF) and IZRL (Israel Innovative Technology ETF). We will be focusing on mainly the actively managed innovation ETFs in this article.


Unlike some ETFs which are passive and follow certain benchmarks indexes, actively managed ETFs rely heavily on the expertise of the portfolio manager and the team to make investment decisions. Such ETFs are not widely available since there is a certain technical challenge in managing the potential arbitrage issue arising from such mode of management. Hence, actively managed ETFs tend to have a higher expense ratio. In this case, the ARK ETFs have an expense ratio of ~0.75%.


Within the 5 actively managed ETFs which are highlighted earlier, each of them covers a specific domain as illustrated by their name with the exception of ARKK (ARK Innovation ETF). ARKK is more generic in their selection of innovation companies as it does not cover a specific domain like the others. Hence, investors also tend to choose ARKK if they want to have a wider exposure in various technological domains. It also currently accounts for more than 50% of the net assets for ARK. The number of holdings in these ARK ETFs tend to be anywhere between 30+ and 50+. That's certainly not a high number compared to many other ETFs but has certainly proven to be sufficient in outperforming the benchmark indexes thus far.


So what's the kind of framework that is adopted in adoption of disruptive innovation and how to ARK adopt it?


There are five customer segments in adopting any kind of disruptive innovation. They are namely innovators, early adopters, early majority, late majority and laggards. What ARK aims to achieve is to identify companies which have yet to have a customer base in the "early majority" but will eventually do so. It's about identifying such companies early in the cycle and realise the maximum upside potential with them.


Having said that, what are the major holdings in ARK ETFs?


Some of the top 10 holdings in ARK ETFs are namely Tesla, Square, Illumina and Zillow etc. Each of them is a company which aims to reinvent the way we do things. For instance, Tesla is reinventing how we use energy, Square is reinventing how we transact, Illumina is reinventing how DNA is explored while Zillow is reinventing how we transact properties. Cathie Wood, the founder and CEO of ARK Invest , is known for the high price target she set for Tesla. Early this year, she told CNBC she has a 5-year price target of $7,000 per share for Tesla. If you take into account the stock split which Tesla has recently, Tesla is now transacting around $2600 per share (current share price multiply by 5). There is still some way to go if Cathie Wood turns out to be right.


The wild success of ARK Invest has some investors even labelling it as a potential Berkshire Hathaway of this generation. This got me thinking.


In an earlier article on Berkshire Hathaway, I have highlighted the strong points of Berkshire Hathaway and its ability to perform well during economic downturns. While Berkshire Hathaway is primarily focused on identifying companies which are usually stable and have huge economic moats, the ARK Invest is focused on finding companies which are usually high growth and the heart of disruptive technologies. In some sense, wouldn't it be good to have a portfolio which has a well-blended mix of both as they sorta "complement" each other?


Let's take a look.


Here is the correlation matrix for ARKK, BRK.B and SPY.

(Source: Portfolio Visualizer)


The correlation between ARKK and BRK.B is moderately or even lowly correlated. Having assets with low correlation usually provides more balance for your portfolio as these assets will not have identical performances in all economic conditions. Not surprisingly, both ARKK and BRK.B are relatively strongly correlated to SPY since SPY is the market benchmark and likely comprises companies in both ARKK and BRK.B. Hence, this presents a few options. You could either have SPY in your portfolio (which eliminates the need to have ARKK and BRK.B too since they are strongly correlated to SPY) or you could attempt to have a good mix of ARKK and BRK.B to attempt to beat the market (SPY).


For instance, I could attempt to optimise the portfolio mix between ARKK and BRK.B to minimise the maximum drawdown of the portfolio based on historical data as seen below.

(Source: Portfolio Visualizer)


This could give me a portfolio mix of 57% ARKK and 43% BRK.B.


If I were to further backtest this portfolio and compared it with the benchmark index (S&P 500), this is what you will get.

(Source: Portfolio Visualizer)


This portfolio mix outperforms S&P 500 in all the various metrics such as CAGR, Max Drawdown and Sharpe Ratio. Hence, it is definitely a more superior strategy to use compared to just holding SPY in your portfolio. Of course, this is based on historical data and past performances might not be good indicators of future performances. Nonetheless, I would personally consider including this portfolio mix in my portfolio in replacement of SPY.

If you are looking at purchasing ARK ETFs, please do bear in mind that there is currently a fight for control of ARK Invest as Resolute Investment aims to exercise the option to purchase a controlling stake of the company. There are currently a few unknowns in this situation. For instance, would Cathie Wood and her team be serving the same roles with the same interests if Resolute Investment takes control of the company. Given that Cathie Wood and her team are primarily the reason why investors are investing in ARK ETFs, any changes which arise from Resolute Investment might likely rock the boat.


Also, ARK ETFs have enjoyed a good run this year and are mostly at their all-time high. If you are looking at purchasing a stake, you might like to consider DCA just in case there is any retreat in the prices. Of course, this is not professional investment advice so do exercise your own caution.


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