The actively managed ARK Innovation ETF (NYSEMKT:ARKK) blew every other exchange-traded fund (ETF) out of the water in 2017, putting up a total return of 87.3% for the year, according to Morningstar. It was an incredible year for the fund, topping the average tech-focused fund return by 52 percentage points, which propelled the fund into the top 3% of tech ETFs by performance over a 3-year period.
From obscurity to top performance
ARK Innovation ETF had just $16.2 million of assets tied up in a number of high-tech companies when it filed its semi-annual report in February 2017. But just one stock, which at that point made up just 2.6% of the fund's assets, drove the bulk of its performance throughout the year: Bitcoin Investment Trust (NASDAQOTH:GBTC).
ARK Innovation ETF was early on bitcoin and the bet paid off handsomely, both for its investors, and for the ETF's manager. Bitcoin Investment Trust returned 1,557% in 2017, fueling gains for the ARK Innovation ETF all throughout the year.
What's most remarkable is that ARK Innovation ETF let its biggest winner ride, within some reasonable limits. Piecing together data from its regulatory filings, I find that the position grew as large as 8% of the portfolio at the end of May 2017, when Bitcoin Investment Trust was already up nearly 300% for the year. It began paring back on its bitcoin stake later in the year as bitcoin's price surged.
Actively managed funds are often criticized for cashing in on their winners early when they're ahead in an effort to lock in a market-beating return for the full year. ARK Innovation let its big winner run, further separating it from the pack of tech ETFs.
2017 put this fund on the map
ARK Innovation ETF's market-beating returns brought piles of fresh cash into the fund. The ARK Innovation ETF now holds about $428 million of client assets, nearly 26 times more than it had less than one year ago, before bitcoin's rally put it atop the list of the best-performing ETFs.
Retail investors appear to be the biggest investors in the ETF. Fidelity, Charles Schwab, Morgan Stanley, LPL Financial, and TD Ameritrade, or their subsidiaries, recently ranked as its five-largest owners of record, likely because they act as the brokers for the mom and pop investors who hopped on for the ride.
Performance-chasing investors may want to be careful about assuming this tech ETF can repeat in 2018. Bitcoin seems unlikely to put up another year of quadruple digit returns, if only because such a rally would send bitcoin's market cap above $2.3 trillion, making it about 17% as valuable as all U.S. dollars in existence.