Cathie Wood has become one of the more recognizable names on Wall Street, viewed by many as the poster child for high-growth, high-risk investing. Her investment firm, Ark Invest, is known for its bets on disruptive growth stocks like Zoom Video Communications, Coinbase Global, and Tesla.
During the early days of the COVID-19 pandemic when the stock market was entering a bull run, Wood's flagship fund, the Ark Innovation ETF (ARKK 1.05%), became one of the hottest funds on the stock market. In 2016, the ETF averaged just $9.1 million in assets under management (AUM). In 2020, it averaged $6.3 billion in AUM. By Feb. 2021, AUM hit their peak of $27.9 billion.
That trend has drastically changed course, though. Despite the fund rallying over 60% year to date -- after dropping two-thirds of its value in 2022 -- investors are still jumping ship and pulling their money. Ark Innovation is down to about $9 billion in AUM, and investors have withdrawn over $700 million from the ETF in the past 12 months. Honestly, I don't blame them.
Ark Innovation charges a premium price
One of the major drawbacks of this actively-managed ETF is the high expense ratio of 0.75%. For perspective, that's more than 25 times the cost of popular S&P 500 funds like the Vanguard S&P 500 ETF (VOO 1.00%) and iShares Core S&P 500 ETF, which have a 0.03% expense ratio.
A difference of less than 1% may not seem like a lot on paper, but it adds up over the course of years. Suppose someone invests $10,000 annually, averaging 10% annual returns over 10 years. The difference in paying 0.03% versus 0.75% in fees is well over $5,000 during that span. Extend that throughout a career with an increasingly large portfolio, and it could easily creep into the five-figure range or higher.
In the case of a target-date fund, which can contain multiple assets and essentially operate as its own self-balancing portfolio, a higher expense ratio may be justifiable. It's hard to justify it with a single ETF like ARKK, especially given its long-term returns. Past results don't guarantee future performance, but as it stands, the extra cost hasn't been offset by consistent long-term gains.
A lot is riding on a handful of companies
Trades happen often within the fund, but Ark says it aims to maintain between 35 and 55 holdings. The top 10 holdings make up over 63% of the fund as of this writing, and Tesla, Coinbase, and Roku alone account for 27% of the fund.
To be fair, the S&P 500 has gotten a lot more concentrated with the surge of mega-cap stocks like Apple and Microsoft (they make up over 14% of the S&P 500), but it still covers a wide enough band of the broad market to serve as a one-stop shop for investors.
As of Dec. 2022, only about one-quarter of the ETF's holdings were profitable. That's not a total surprise considering the fund is made up of younger growth companies, but it's still far from ideal. With the level of concentration and risk in this ETF, a lot is riding on a handful of companies potentially taking off instead of tried-and-true companies that have stood the test of time.
Sometimes, stability is what really matters
There's no dodging volatility in the stock market, but you can enjoy a sense of stability, especially over the long term. With seemingly more questions than answers about the economy in the past year, investors have flocked toward more stable stocks and industries.
The S&P 500 realistically won't see 300% gains in 11 months like ARKK experienced in 2020, but it's also not likely to experience an 80% decline in less than two years like ARKK did after hitting its peak. The S&P 500 has its fair share of price swings, but you can bet on the long-term stability of that index with far more confidence than ARKK.
Data by YCharts.
Of course, not every investor is the same. Some are much more willing to take on the higher risk and volatility for the chance at greater upside, and that's fine too. There's no cookie-cutter approach to investing, but there is a thin line between investing and speculating.
For those who like the moonshots that many of the Ark Innovation ETF's holdings represent, a position in that fund should be only be a small, supplemental piece of their portfolio, not a foundational part of it.
