ARK Invest CEO Cathie Wood is one of the most followed stock pickers on Wall Street. Her appeal centers around the theme-based investing strategy of ARK Invest's family of exchange-traded funds (ETFs). Namely, these funds aim to invest in companies developing disruptive technologies across a wide variety of industries, such as information technology, transportation, and human medicine, to name a few.
In 2023, Wood's disruptive tech thesis has led her flagship fund ARK Innovation ETF (ARKK 1.05%) to dramatically outperform the S&P 500, along with most of its peers in the growth ETF category.
ARKK Total Return Level data by YCharts.
Will ARK Innovation continue to outshine the broader market in 2024? Let's take a closer look at the fund's strategy, holdings, and performance to find out.
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A breakdown of ARK's holdings and performance
ARK Innovation ETF is a fund that actively selects its holdings and charges 0.75% of the assets as management fees. This means that for every $10,000 invested in the fund, investors pay $75 annually. Compared to other growth-oriented tech funds, ARK's fees are slightly lower than the average of 0.99%.
However, ARK is considerably more expensive than similar passively managed ETFs offered by industry titans such as Fidelity, Vanguard, and Charles Schwab. Although ARK has performed better than these passive ETFs this year, it has lagged behind them in the past one-, three-, and 10-year periods. ARK has also been one of the most volatile growth ETFs by a wide margin since its inception (see graph below).
ARKK Beta (1Y) data by YCharts.
ARK's top 10 holdings consist of Coinbase, Roku, UiPath, Tesla, Zoom Video Communications, Block, Roblox, Twilio, CRISPR Therapeutics, and Unity Software. At the end of the most recent quarter, the fund was tilted toward the information technology sector (31.3%), followed by healthcare (21.6%), financials (15.3%), consumer discretionary (15.2), and communication services (12.5%).
The key takeaway is that the fund doesn't hold many well-established names with formidable economic moats. Some of these companies, like Tesla, Roblox, and CRISPR, have the inside track on eventually building an economic moat but are still in the process of working toward this key operating goal. And given the early-stage nature of most of the fund's holdings, ARK is highly likely to remain on the volatile side for the foreseeable future.
Verdict
One of the key factors to take into account when investing in individual stocks or ETFs is momentum. There's no clear explanation in the academic literature for why momentum has such a strong influence on stock performance, but it has consistently emerged as a key governing dynamic in rigorous statistical analyses of stock returns over different periods.
Based on this insight, ARK's impressive performance in 2023 should bode well for its prospects in 2024, especially if small-cap and mid-cap stocks rally next year in response to an interest-rate cut. However, ARK's high fees and volatility require investors to keep a close eye on the fund's performance. Trend changes in this segment of the market tend to be sharp and sudden.
