Cathie Wood has become a prominent name in the investing world as the head of one of Wall Street's more recognizable investment management firms, ARK Invest. Wood is best known for her high-risk, high-reward investing approach focused on "innovative" and "disruptive" companies.
That approach helped make ARK Invest's flagship fund, the Ark Innovation ETF (ARKK 1.05%), one of the hottest on the stock market. From 2016 to its peak in Feb. 2021, the Ark Innovation ETF jumped from $9.1 million in assets under management (AUM) to over $27 billion.
The popularity of Wood and her flagship fund makes it an intriguing option for investors looking to capitalize on the potential success of emerging technologies and industries. However, before jumping on the ARKK bandwagon, there's another option I'd encourage people to invest in first: an S&P 500 ETF.
What is the ARK Innovation ETF?
The ARK Innovation ETF is an actively-managed fund that follows ARK Invest's overall theme of "disruptive innovation." Since the fund is actively managed, the number of holdings can vary, but it aims to hold 35 to 55 stocks at any given time.
Its top five holdings are Tesla, Zoom Video Communications, Roku, Coinbase, and UiPath. It's broken down by sector as follows:
- Information Technology: 31.3%
- Healthcare: 21.6%
- Financials: 15.3%
- Consumer Discretionary: 15.2%
- Communication Services: 12.5%
- Materials: 3.1%
- Industrials: 0.9%
The ARK Innovation ETF has been around since Oct. 2014, but it wasn't until the COVID-19 pandemic that its popularity exploded, riding the wave of increased interest in stock investing, especially growth stocks. From March 2020 to Feb. 2021, the index surged over 310%. However, it has since lost three-quarters of its value.
What is an S&P 500 ETF?
The S&P 500 is the most followed index on the stock market and one of the three primary benchmarks, along with the Nasdaq Composite and Dow Jones.
It tracks 500 of the largest U.S. companies by market cap. That means it includes many companies that are essential to the U.S. economy -- so much so that its performance is often considered a barometer for the economy overall. When investors talk about the "broad market's" performance, they're typically referring to the S&P 500.
Three popular ETFs that track the S&P 500 include:
| ETF | Expense Ratio |
|---|---|
| SPDR S&P 500 ETF Trust (SPY 0.95%) | 0.0945% |
| iShares Core S&P 500 ETF (IVV 0.98%) | 0.03% |
| Vanguard S&P 500 ETF (VOO 1.00%) | 0.03% |
Data source: State Street Global Advisors, BlackRock, and Vanguard.
Since these ETFs mirror the same index, there isn't much difference between them besides the expense ratio. My personal go-to is the Vanguard S&P 500 because of its low cost.
Why I'd choose the S&P 500 over the ARK Innovation ETF
My preference for an S&P 500 ETF boils down to three advantages over the ARK Innovation ETF: diversification, stability, and cost.
The Vanguard S&P 500 ETF contains 505 stocks, compared to the 35 to 55 in the ARK Innovation ETF. This reduces risk because the S&P 500 offers exposure to a wider range of the market, including growth opportunities in sectors that aren't represented in the ARK Innovation ETF.
The overall intent of the ARK Innovation ETF -- to invest in companies seeking to disrupt established industries -- also means it's likely to have much more volatility than the S&P 500. That doesn't mean the S&P 500 won't have its fair share of ups and downs, but it's unlikely that you'll see the extreme swings within a relatively short period that we've seen with the ARK Innovation ETF.
Data by YCharts.
The last reason may be the one that flies under the radar. The ARK Innovation ETF has an expense ratio of 0.75%, 25 times that of the Vanguard S&P 500 ETF.
For perspective, let's imagine someone invests $500 monthly into a fund and averages 10% annual returns over 25 years. With the 0.75% expense ratio, they will end up paying over $62,000 in fees. At 0.03%, they will pay just $2,700.
This isn't to say the ARK Innovation ETF is a bad investment. However, the S&P 500 can be a cornerstone in an investor's portfolio. I don't think that's the case with the ARK Innovation ETF.
