Cathie Wood is the founder of Ark Investment Management, which operates several exchange-traded funds (ETFs) focused on innovative technologies. In 2023, she predicted software companies would be the next big investment opportunity when it comes to artificial intelligence (AI), saying they could generate $8 in revenue for every dollar they spend on chips from suppliers like Nvidia.
Wood positioned many of Ark's ETFs to reflect that view. The Ark Innovation ETF (ARKK 1.25%) and the Ark Autonomous Technology and Robotics ETF (ARKQ 1.48%) offer very healthy exposure to AI software stocks, and they delivered returns of 34% and 57%, respectively, over the last 12 months.
Here's why investors might want to own both ETFs if Wood proves to be right -- but beware, they have a history of generating very volatile returns.
Image source: Getty Images.
1. Ark Innovation ETF
The Ark Innovation ETF is the firm's flagship fund. It's actively managed, which means Wood and her team buy and sell stocks within the portfolio whenever they feel adjustments will benefit shareholders. The fund primarily invests in "disruptive innovation," which Ark describes as any technology that has the potential to change how the world works.
Those technologies include next-generation cloud computing, precision therapies, digital assets, and AI subsegments like autonomous mobility, intelligent devices, and neural networks.
The Ark ETF holds 34 different stocks and securities, but its top five positions alone account for 43.8% of the total value of its portfolio:
|
Stock |
Ark ETF Portfolio Weighting |
|---|---|
|
1. Tesla (TSLA 0.09%) |
14.39% |
|
2. Roku |
8.98% |
|
3. Coinbase |
8.77% |
|
4. Roblox |
6.47% |
|
5. Robinhood Markets |
5.24% |
Data source: Ark Investment Management. Portfolio weightings are accurate as of Jan. 22, 2025, and are subject to change.
Those five holdings don't appear to be AI software stocks at face value. However, Wood believes Tesla is the biggest AI project in the entire world because of its full self-driving (FSD) software. Tesla recently unveiled its autonomous Cybercab robotaxi, which will launch with no steering wheel or even pedals because it will be powered entirely by FSD.
Ark's research suggests Tesla's annual revenue could grow more than tenfold to $1.2 trillion by 2029, with 63% coming from FSD software and the Cybercab platform.
NYSEMKT: ARKK
Key Data Points
Even Roku, the provider of streaming services and smart televisions, uses AI to direct relevant content to its users to create a more engaging experience. Plus, its latest smart TVs use an AI software feature called Smart Picture to optimize the display depending on what you're watching.
Outside of its top five positions, the Ark Innovation ETF holds other popular AI software stocks like Palantir Technologies, Tempus AI, UiPath, Meta Platforms, and more.
Specialized, actively managed ETFs usually aren't cheap to own, and this one is no exception. It has an expense ratio of 0.75%, which is the proportion of the fund deducted each year to cover management costs. Index funds from issuers like Vanguard, for example, typically charge 0.1% per year (or less). Higher fees can detract from investors' returns over time.
As I mentioned earlier, Ark's ETFs tend to be quite volatile because of the stocks they hold. Despite delivering a strong return of 34% over the last 12 months, the Ark Innovation ETF is still down 60% from its record high set during 2021. It has the potential to do extremely well over the long term because of AI, but investors need to brace for big swings in performance.
Image source: Tesla.
2. Ark Autonomous Technology and Robotics ETF
This Ark ETF has a much narrower focus, because it invests exclusively in just a few areas of the tech sector like AI, robotics, and automation. It's also actively managed, so Wood and her team regularly adjust its portfolio.
The ETF currently holds 37 different stocks, and its top five account for 45.2% of the total value of its portfolio:
|
Stock |
Ark ETF Portfolio Weighting |
|---|---|
|
1. Tesla |
14.54% |
|
2. Kratos Defense |
9.90% |
|
3. Teradyne |
8.41% |
|
4. Rocket Labs |
6.68% |
|
5. Archer Aviation |
5.66% |
Data source: Ark Investment Management. Portfolio weightings are accurate as of Jan. 22, 2025, and are subject to change.
You will notice Tesla is also the top holding in this ETF, which speaks to Wood's conviction about the future of autonomous driving. Speaking of which, Kratos Defense designs and manufactures unmanned systems, including autonomous fighter planes and trucks, designed to help the U.S. military achieve its goals while placing fewer troops in harm's way.
Then there is Teradyne, which helps businesses across several industries automate their processes. It even makes autonomous robots capable of transporting products and equipment around manufacturing facilities.
Outside of its top five holdings, the Ark ETF holds Palantir, Amazon, UiPath, and Alphabet, all of which have a presence in AI software. The ETF even holds Nvidia, which, despite being known for its AI hardware, offers the software its customers need to create autonomous robots and self-driving vehicles.
The Ark Autonomous Technology and Robotics ETF has an expense ratio of 0.75%. However, it has still delivered a compound annual return of 14.8% since it was established in 2014, which outpaces the average annual return of 11.8% in the Ark Innovation ETF over the same period.
It's even beating the S&P 500, which has delivered a compound annual return of 13.7% since 2014.
This ETF is down by just 15% from its 2021 record high, so it's recovering at a much faster pace than the Innovation ETF. If Wood proves to be right about AI software, it won't be long before the fund is trading at new all-time highs.
