Please ensure Javascript is enabled for purposes of website accessibility

5 Reasons I Regret Buying Cathie Wood's ARK Innovation ETF

By Leo Sun - May 28, 2021 at 5:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

My diversified bet on the market's highest-growth tech stocks backfired.

I bought a new position in Cathie Wood's flagship exchange-traded fund, the ARK Innovation ETF (ARKK 4.19%), back in February. At the time, I thought it was a good way to gain some diversified exposure to higher-growth stocks that I didn't want to start full positions in.

Unfortunately, I bought the ETF near its all-time highs, and it's now trading about 30% below my purchase price. I'm not losing any sleep over ARK's losses, since the ETF only accounts for 1.6% of my portfolio, but I'm also reluctant to add more shares, for five simple reasons.

Three glass piggy banks labeled with the letters "ETF".

Image source: Getty Images.

1. Most of ARK Innovation's top holdings trade in tandem

ETFs that track major indexes, such as the Vanguard S&P 500 ETF (VOO 1.71%), provide instant diversification across multiple sectors. However, the ARK Innovation ETF mainly invests in high-growth tech companies, many of which are unprofitable and trade at frothy valuations.

As a result, most of its top holdings rise and fall in tandem -- which doesn't make it much safer than an individual stock. That also nullifies my plan to own the ETF for its "diverse" portfolio of growth stocks.

2. The market rotation is crushing ARK Innovation

The ARK Innovation ETF soared nearly 150% last year as investors flocked to tech stocks throughout the pandemic. A new breed of retail investors, empowered by free trading platforms like Robinhood, amplified those gains. Many of those investors adored ARK Innovation's top holdings, which include Tesla, Teladoc, Roku, Square, and Shopify.

However, many of those stocks have underperformed the S&P 500 this year as higher bond yields, inflation fears, and a focus on reopening plays have sparked a rotation from growth to value stocks. That rotation will likely continue for the foreseeable future, and prevent ARK's top stocks from beating the market.

3. Swapping out stable growth stocks for speculative ones

As the ARK Innovation ETF floundered, it sold its more stable stocks -- including Apple, NVIDIA, and Baidu -- and bought more speculative ones, like Palantir, Coinbase (COIN 7.73%), and Skillz (SKLZ 7.34%).

That trend is troubling, because it suggests ARK is trying to replicate its previous gains by chasing growth and hype at any price. I also wouldn't personally buy stocks like Coinbase and Skillz because they have glaring weaknesses: Coinbase is essentially an all-in bet on cryptocurrencies, while Skillz is still deeply unprofitable and overwhelmingly dependent on just two game publishers.

4. It's easy to buy ARK's winners while avoiding its losers

I can understand why ARK's ETFs might appeal to some inexperienced investors. They offer exposure to a wide range of companies that have disruptive growth potential, and the fund only needs a few winners to offset its losers.

But as someone who follows the stock market daily, I should have simply used ARK's holdings as a starting point for fresh investing ideas. If I did that, I probably would have bought more shares of promising companies like Shopify and Square while avoiding stakes in speculative companies like Coinbase and Skillz.

5. The management fees

As an actively managed ETF, ARK Innovation charges higher fees than passively managed ETFs that merely track existing indexes. ARK Innovation charges an expense ratio of 0.75%. Vanguard's S&P 500 ETF charges an expense ratio of just 0.03%.

Invesco's QQQ ETF (QQQ 1.95%), the popular fund that holds a diverse basket of top tech stocks like Apple, Amazon, and Microsoft, charges an expense ratio of just 0.2%. Here's how ARK Innovation fared against those two ETFs this year.

ARKK Chart

Source: YCharts

ARK Innovation might eventually recover, but it could struggle to justify its higher fees if its current slump continues. Therefore, it's not surprising that the fund was hit by record redemptions over the past few months.

The road ahead

I don't plan to sell my ARK Innovation shares anytime soon, but I also don't plan to average down with more shares. For now, I think it's a better idea to be selective with individual growth stocks instead of trying to cast a wide net over all of the market's hottest names with this overpriced ETF.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of ARK Innovation ETF, Amazon, Apple, Baidu, Palantir Technologies Inc., and Square. The Motley Fool owns shares of and recommends Amazon, Apple, Baidu, Microsoft, NVIDIA, Palantir Technologies Inc., Roku, Shopify, Skillz Inc., Square, Teladoc Health, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, short January 2023 $1,160 calls on Shopify, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

ARK ETF Trust - ARK Innovation ETF Stock Quote
ARK ETF Trust - ARK Innovation ETF
ARKK
$52.01 (4.19%) $2.09
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$291.91 (1.70%) $4.89
Apple Inc. Stock Quote
Apple Inc.
AAPL
$172.10 (2.14%) $3.61
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$900.09 (4.67%) $40.20
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$143.55 (2.07%) $2.91
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$187.09 (4.28%) $7.67
PowerShares QQQ Trust, Series 1 Stock Quote
PowerShares QQQ Trust, Series 1
QQQ
$330.39 (1.95%) $6.31
Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$140.36 (0.70%) $0.98
Vanguard Index Funds - Vanguard S&P 500 ETF Stock Quote
Vanguard Index Funds - Vanguard S&P 500 ETF
VOO
$392.67 (1.71%) $6.61
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$40.76 (0.84%) $0.34
Block, Inc. Stock Quote
Block, Inc.
SQ
$87.95 (2.28%) $1.96
Roku Stock Quote
Roku
ROKU
$83.81 (3.92%) $3.16
Teladoc Health, Inc. Stock Quote
Teladoc Health, Inc.
TDOC
$40.32 (6.13%) $2.33
Palantir Technologies Inc. Stock Quote
Palantir Technologies Inc.
PLTR
$9.91 (5.20%) $0.49
Skillz Inc. Stock Quote
Skillz Inc.
SKLZ
$1.90 (7.34%) $0.13
Coinbase Global, Inc. Stock Quote
Coinbase Global, Inc.
COIN
$90.49 (7.73%) $6.49

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.