ARKK Provides exposure to some of the largest and fastest-growing US stocks, however with some questioning the seemingly large valuations, amid the growth of Meme Stocks, NFT’s, and YOLO trades, we take a look and see Should I Buy ARKK ETF 2021?
Should I Buy ARKK ETF: Pros and Cons
- Exposure to Some of the Biggest Global Companies
- Great Returns
- Active Fund of the Year
- No Extended History of Performance
- Higher Fees than Passive Strategies
- History of Passive outperforming Active
- High Portfolio Turnover
Who Should Buy ARKK Shares?
ARK’s Innovation ETF (ARKK) and fund manager Cathy Wood have gained massive publicity and a cult-like following after ARKK’s Award-winning performance over the last year. ARKK is used by investors with a high-risk tolerance looking to gain an edge over the S&P500.
Why Should I Buy ARKK?
✓Exposure To Innovation: Aims for thematic multi-cap exposure to innovation across sectors. ARK believes the securities held in ARKK present the best risk-reward opportunities from ARK’s innovation-based themes
✓Growth Potential: Aims to capture long-term growth with low correlation to relative returns to traditional growth strategies and negative correlation to value strategies.
✓Tool For Diversification: Offers a tool for diversification due to little overlap with traditional indices. It can be a complement to traditional value/growth strategies.
✓Cost-Effective: Provides a lower-cost alternative to mutual funds with true active management in an Exchange Traded Fund (ETF) that invests in rapidly moving themes.
Should I Buy ARKK – Facts
|Number of Holdings||51|
|Assets Under Management||$25.52 Billion|
|Inception Date||31 Oct 2014|
|Income Distributions||At least Annually|
|Total 5-Year Returns||48.55% p.a|
ARKK Share Price
The ARKK ETF price is up to $124.88 per unit in the past twelve months, representing a gain of over 38.99%. This is in comparison to the S&P 500 which has returned 31% over the same period.
Over the past 5-years, the NAV of ARKK has increased 48.38%, compared to the SPX Index which has returned 17.65%. Despite ARKK’s much higher management fee Cathy Wood’s ARKK has justified the price by delivering excellent returns.
Should I Buy ARKK – About
The ARK Innovation ETF or ARKK is the largest actively managed ETF by assets under management (AUM), with $25.52 Billion in funds. The fund was started on the 31st of Oct 2014. In the past two years, the fund’s popularity has increased massively.
The ETF is domiciled in the US and trades on the NYSE. As such Australian investors looking to gain exposure will have to purchase the fund through an International Broker and complete a W-8BEN form.
ARKK is an actively managed ETF that seeks long-term growth of capital by investing under normal circumstances primarily (at least 65% of its assets) in domestic and foreign equity securities of companies that are relevant to the Fund’s investment theme of disruptive innovation.
ARK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled new product or service that potentially changes the way the world works.
ETF Assets Under Management AUM
We can see that ARKK’s AUM has increased exponentially over the past two years.
From this, we can see the returns of 2020, drew in a lot of investors and funds. However, as many new investors jumped in on “FOMO”, they entered after the peak returns of 2020, leaving many disappointed by ARKK’s YTD performance (only 0.30%)!
Should I Buy ARKK – Portfolio Goal
ARKK is an actively managed Exchange Traded Fund (ETF) that seeks long-term growth of capital. It seeks to achieve this investment objective by investing under normal circumstances primarily (at least 65% of its assets) in domestic and foreign equity securities of companies that are relevant to ARKK’s investment theme of disruptive innovation.
ARK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled new product or service that potentially changes the way the world works. Source, ARK Invest
ARKK ETF Attributes
|Currency Hedged Fund||No|
|Synthetic Replication Fund||No|
|Has Dividend Investment Plan||No|
|Socially Responsible Fund||No|
ARK Innovation ETF has an MSCI ESG Fund Rating of BBB based on a score of 4.68 out of 10.
The ARKK Benchmark Index: S&P 500
ARKK is often benchmarked against the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities.
The index includes 500 leading companies and covers approximately 80% of available market capitalization.
Standards and Poors 500 is a market-capitalization-weighted index, meaning each company included is in proportion to the float market value.
The index is also float-adjusted, meaning that the index only counts those shares that are available to investors and excludes closely-held shares or shares held by governments or other companies.
The index was created by Standards and Poors (S&P) on March 4th, 1957. For more information on the S&P 500 and tracking funds, check out: Should I Buy IVV ETF?
Top 10 S&P 500 Holdings
- Apple (6.1%)
- Microsoft (5.94%)
- Amazon (3.75%)
- Facebook Class A (2.3%)
- Alphabet Class A (2.24%)
- Alphabet Class C (2.13%)
- Nvidia (1.45%)
- Berkshire Hathaway Class B (1.42%)
- Tesla (1.42%)
- JP Morgan Chase (1.29%)
Should I Buy ARKK – Holdings
Much like the entire US market, ARKK is heavily weighted towards the technology sector. We can see in the Morningstar sector table below that Technology accounts for 33.48% of holdings. ARKK is severely weighted towards Tesla. We can see 10.46% of the fund is allocated to Tesla, almost double the second-largest holding (Teladoc Health).
Their large bet on Tesla paid off in 2020, however, has been a point of controversy as many investors see it as overpriced.
Due to its large dependence on technology ARKK can be seen as a great way to diversify from Australian holdings. With technology businesses being very under-represented within the ASX accounting for only 4.41% of holdings.
ARKK ETF Top 10 Holdings
- Tesla (10.46%)
- Teladoc Health (5.52%)
- Roku (5.27%)
- Coinbase Global Class A (4.84%)
- Unity Software (4.61%)
- Zoom Video Communications (4.33%)
- Square (3.94%)
- Shopify Class A (3.92%)
- Twilio (3.61%)
- Spotify Technology (3.45%)
Breaking Down ARKK’s Top Three Holdings
Tesla was founded in 2003 and now produces the famous all-electric futuristic vehicles and also infinitely scalable clean energy generation and storage products. In 2020, Tesla had the most sales of battery electric vehicles and plug-in electric vehicles, capturing 16% of the plug-in market and 23% of the battery-electric market.
“Over a multi-year horizon, we expect to achieve 50% average annual growth in vehicle deliveries”
Tesla IPOed in 2010. The company issued 13.3 million shares of common stock at a price of $17.00 per share, raising $226 million.
|Market Capitalisation||$725.05 billion|
|Share Price||$732.39 per share|
|EPS||$1.90 / share|
Teladoc Health is a global player in the whole-person virtual care space. Teladoc is multinational telemedicine and virtual healthcare group. They provide services in telehealth, medical opinions and services, and telehealth licensable platforms.
Teladoc is active in 130 countries serving around 40 million members in 2021
The group listed its initial public offering on the New York Stock Exchange on July 1, 2015 at $28 per share.
|Market Capitalisation||$23.161 billion|
|Share Price||$145.44 per share|
|EPS||-$5.86 / share|
Roku is the company that pioneered streaming for the TV. Roku streaming players are a more convenient and cost-effective way to watch TV. Just plug it into your TV, connect to the internet, set up a Roku account, and start streaming your favorites.
Roku has more than 55 million active accounts, according to its quarterly earnings report
Roku allows users to watch free and paid media content on their TV via the Internet. It makes services like Netflix, Amazon Prime Video, Hulu, available to stream.
|Market Capitalisation||$46.239 billion|
|Share Price||$346.49 per share|
|EPS||$1.72 / share|
ARK Asset Class exposure
|Cash||DREYFUS GOVT CASH MAN INS||0.24%|
At the time of writing ARKK is nearly completely equity-focused. The fund is able to take a temporary defensive position in cash or cash equivalents in response to adverse market, economic, political, or other conditions.
ARKK will not invest more than 30% of its total assets in securities issued by a single company, fund, or short-term financial products of such company. Source, Ark Invest
Morningstar Sector Allocations
|Sectors||Fund %||Cat %|
ARKK ETF Fees
- Management Fee: 0.75% p.a
- Indirect Costs: 0%
- Bid/Ask Spread: 0.3% (30-day average)
How Are ARKK Management Fees Paid?
Management fees are automatically deducted from the fund’s Net Asset Value on a daily basis. This means is you as an investor never have to directly send money to Ark Invest.
It is all processed by the fund as they deduct the fees from the underlying earnings/capital of the fund. Because of this you never really notice the fees, instead, it just reduces the fund’s performance over time.
Performance Fees and Compensation
ARKK does not charge performance fees on its ETFs. The provider, ARK Invest, generates its income via its management fees.
The fund manager Cathy Wood is not paid a salary but instead gains income as the significant equity holder of ARK Invest. She is also paid a bonus based on the overall financial performance of ARK Invest.
The bid-ask spread is the difference in price between the highest price that a buyer is willing to pay for a security and the lowest price for which a seller is willing to sell it.
- The narrower the spread the better, as this reduces the trading costs associated with buying and selling ETFs
- Exchange-based spreads, as on the ASX, are set by the competitive tensions between market markers
- Larger Funds will tend to have lower bid-ask spreads.
- Bid-Ask spreads are not set but constantly change throughout the day, depending on supply and demand.
|Average Bid/Ask Spread||0.03%||0.02%||0.07%||–||–||0.02%||0.02%||0.04|
Should I Buy ARKK – Performance
In the below table we set out the returns of ARKK compared to the S&P 500 Index over various time frames. From this data, we can see that the aggregated average returns over the 1,3, and 5 year periods have outperformed the S&P 500.
We have also compared the performance of ARKK to several other popular ETFs. They are expressed as average returns per annum.
|1 year||3 years||5 years||10 years||Inception|
Arkk has become popular following stellar results over the past year. Averaged over the last 5-years the ARKK fund has far outperformed the S&P500 (17.76%p.a.) with a breathtaking return of 48.55% per year.
The large majority of ARKK’s performance can be attributed to the years 2017 and 2020, where we saw increases of 87.34% and 152.8% respectively. In comparison, the S&P 500 returned 21.83% in 2017 and 18.4% in 2020.
The below performance graph by Ark Invest demonstrates the cumulative total returns of ARKK over a ten-year period.
In this data, we can see the average fundamental factors across the ARKK holdings. We can see the weighted average PE ratio is not given as the average holdings are loss-making. The price to book is 8.24x and the ROE is -8.48%.
|Return on Equity||-8.48%||29.24%|
|Return on Assets||-8.35%||10.29%|
|Earnings Yield (dividend)||1.68%||1.08%|
We can see in terms of basic fundamentals the ARKK total average appears much more expensive than the S&P 500. ARKK’s holdings have an aggregated ROE of -8.48%, compared to the S&P 500’s impressive 29.24%. When comparing book value, ARKK appears 74% more expensive than the S&P.
We can see for the majority of the fund’s existence the PE ratio has been 0, or incalculable since the aggregated holdings are loss-making.
ARKK’s aggregate price/book average ratio has increased massively in the last two years. We can see prior to 2020, the average PB ratio was 4x which was in line with the S&P 500 average valuation.
ARKK is the largest actively managed equity ETF by fund size. The second-largest is the Dimensional U.S. Core Equity 2 ETF (DFAC). DFAC seeks to gain long-term returns with broad active exposure to US equities with 2514 holdings. Both funds are domiciled in the US, thus investors will have to complete a W-8BEN form.
Australian investors looking to gain international or US exposure may also consider IVV, VTS, VDHG, and VGAD.
|Benchmark||S&P 500||Russell 3000||S&P 500||CRSP US Total Market||High Growth Comp.||MSCI World ex-Aus|
|Number of Holdings||51||2514||509||3935||7*||1505|
|Assets Under Management||$25B||$13.3B||$4.5B||$2.79B||$1.1B||$1.8B|
|Inception Date||31 Oct 2014||04 Nov 2007||10 Oct 2007||8 May 2009||20 Nov 2017||20 Nov 2014|
|Distribution Reinvestment Plan||No||No||Yes||No||Yes||Yes|
|Total 3-Year Returns||45.21p.a||14.89p.a.||18.2%p.a||18.18 % p.a||11.36% p.a|
From our comparison, we can see that ARKK is a much larger fund in terms of assets under management compared to the ASX-listed rivals. Where we compare against total fund size ARKK is actually small in comparison (IVV total fund size: $312 Billion).
We can see ARKK being actively managed and traded has a very high turnover ratio, which can cause larger tax implications. 80% of the fund is turnover annually.
We can see that ARKK being an actively managed fund, requiring more fund manager insight has a higher management fee of 0.75%.
ARKK’s fee of 0.75% equates to $75 per year on a $10k investment.
Since an ETF is trust structure earnings after fees will be paid out to investors. ARKK is obliged to pay out distributions at least annually. The fund has paid out one distribution each year since 2017.
ARKKs distributions have ranged from 9 cents to $2.044. The latest distribution represents a 1.67% yield at the current share price. Which is largely in line with the S&P 500 average.
|Ex DATE||CASH AMOUNT||RECORD DATE||PAYMENT DATE|
ARKK’s Media and PR Campaign
ARKK has been the most publicized fund of the year. Most of this has arisen from their impressive gains of 152.8% in 2020. These impressive gains landed ARKK the award of Active ETF of the year.
This year the ARK Invest group has been shortlisted for a different reason: Their strong PR and advertising campaigns.
Although publicity helps bring new investors to the fund. Since ARKK is an open ended-fund, it does nothing for returns. This is because the underlying value of an ETF is arbitraged against the actual assets.
In the latest controversy, we have seen renowned ‘Big Short’ Investor Michael Burry take out a $31m position against the flagship ETF. Burry’s argument is largely based on the meme stock bubble and the rise of overpriced stocks with poor fundamentals and no earnings.
“It is too early, she is too hot, and, today, short sellers are timid, but Wall Street will be ruthless in the end,”Michael Burry on Cathy Wood and the ARKK ETF
To his credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing in the housing/mortgage market. I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.— Cathie Wood (@CathieDWood) August 17, 2021
Passive Versus Active Investing
The best case against ARKK is the passive versus active investing argument. It has been proven that passive funds will far outperform active strategies.
Index Funds & ETFs
You have a chance to keep pace with market returns because index funds try to mirror certain market segments. But not all index funds are created equal. Source, Vanguard
Actively managed funds
Or you can try to beat market returns with investments hand-picked by professional money managers. You may be surprised by our active funds’ performance.
SPIVA is a study conducted by Standard and Poor’s to determine the performance of Active Versus Passive Index Funds. This report is one of my favorite pieces of research available and largely one of the reasons that I hold a large portion of my capital in passive index funds, like IVV.
This report found 75.27% of actively managed funds fail to outperform the S&P 500 index, over a five-year period.
“Actively managed funds have historically tended to underperform their benchmarks over short- and long-term periods. This has tended to hold true (with exceptions) across countries and regions. Another recurring theme is that even when a majority of actively managed funds in a category have outperformed the benchmark over one time period, they have usually failed to outperform over multiple periods.”Source: Standard and Poors
Further Resources: Vanguard’s Case for Low-Cost Index-fund Investing
Should I Buy ARKK ETF – Prophet’s Take
The valuation multiples for some of ARKK’s largest holdings may catch up eventually, however, experience and history seems to have shown time and time again that with a large valuation metric comes even higher expectations of future growth from investors.
This is fine whilst the company is able to meet the large growth figures from a smaller base, growth generally seems to slow as a company matures (without innovation). Hence, we believe that without some of ARKK’s largest holdings being able to continue innovating we may see future growth slow and hence the hefty valuation multiples being reduced as a result.
This goes to show that investors that are willing to pay massive multiples for potentially higher growth in the future may be left short when the company doesn’t deliver on the growth or hype.
From the above, you can see that investors who bought at the peak of greed in 2014, have had to wait many years to start realizing gains in the share price again.
ARKK should continue to perform well provided that the ETF’s underlying holdings continue to innovate and generate underlying returns.
The ETF management fees are on the higher side for an ETF at 0.75% p.a., this is compared to IVV at 0.04%. This means that an investment of $10,000 ARKK fees would be around $75 compared to only $4 in IVV. ARKK would need to generate excess returns over the S&P 500 to be able to justify such a hefty management fee.