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ARKK: Why Cathie Wood Won’t Buy Apple Stock

ARK Innovation is down 75% from the peak. For the sake of being conservative, why doesn’t the ETF invest in a more stable and defensive tech name, like Apple stock?

Cathie Wood’s ARK Innovation ETF  (ARKK) - Get ARK Innovation ETF Report has been in the gutter. Her team’s bet on disruptive innovation worked so well in 2020, but the fund now sits a whopping 75% below the all-time highs reached early last year (see chart below).

The sizable losses can be blamed on unsuccessful (so far, at least) investments in stocks like Roku  (ROKU) - Get Roku Inc. Report and Zoom  (ZM) - Get Zoom Video Communications Inc. Report. These pandemic darlings have been down more than 70% in the past 12 months alone.

In the face of such weakness in the high-growth, high-valuation tech space, why doesn’t Cathie Wood add Apple stock  (AAPL) - Get Apple Inc. Report to the ARKK portfolio — a more traditional, arguably more defensive consumer tech name?

Figure 1: ARKK, SPY, ROKU and ZM performance during a one-year period.

Figure 1: ARKK, SPY, ROKU and ZM performance during a one-year period.

ARKK’s main holdings

Before diving in any deeper, let’s review ARKK’s “investment philosophy”. According to the website, ARK Innovation:

“Seeks long-term growth of capital by investing [in] the fund’s investment theme of disruptive innovation. [...] ARK defines disruptive innovation as the introduction of a technologically enabled new product or service that potentially changes the way the world works.”

More specifically, ARKK allocates capital to the likes of Roku, Zoom, and Tesla  (TSLA) - Get Tesla Inc. Report, which combined account for nearly one-fourth of the fund’s assets. These companies are leading the revolution in entertainment, office productivity, and urban transportation, respectively.

Absent from the list of over 30 names in which ARKK invests is Apple stock. Only ARKK’s sister portfolio, the ARK Fintech Innovation  (ARKF) - Get ARK Fintech Innovation ETF Report, owned some AAPL shares in the past year — although it no longer does, as of May 2022.

The Cathie Wood approach to FAAMG

Cathie Wood and her team are not big fans of investing in Apple or its FAAMG peers like Microsoft  (MSFT) - Get Microsoft Corporation Report or Amazon  (AMZN) - Get Inc. Report. She explained why in a CNBC interview that aired a few months ago:

“We are not saying that they are bad stocks at all, and they were a part of our portfolios in the early days. But [...] we believe that our research would be better focused on ‘the next set of FAAMGs’.”

This is a fair position, in my view. Companies like Apple continue to improve drastically on the concept of the smartphone, the tablet, and the personal computer, for example. And granted, the Cupertino company could still be a disruptor in mixed reality and autonomous cars.

But it is much more likely, in my opinion, that “the next big thing” in tech will come from outsiders that are trying to disrupt the status quo. The electric vehicle revolution has been spearheaded by Tesla, not Ford  (F) - Get Ford Motor Company Report. Peer-to-peer payments and transactions have been popularized by PayPal  (PYPL) - Get PayPal Holdings Inc. Report and Block  (SQ) - Get Block Inc. Class A Report, not by Wells Fargo  (WFC) - Get Wells Fargo & Company Report. The list goes on.

AAPL: money on the sidelines

Then, there is the issue of timing. Cathie Wood has also stated that she would consider buying FAAMG stocks like AAPL if she thought that disruptive innovation traded at unreasonably high prices. In other words: buying Apple stock would be akin to parking money on the sidelines.

Now is certainly not the time for such a move. AAPL has been down “only” 23% from its all-time high, while ARKK has already lost three-fourths of its peak value. Over the past five years, AAPL has returned a cumulative 265%, while ARKK has produced meager gains of 35%.

If there is a “cheap stock” in the market today, that is likely to be one of ARK Innovation’s key holdings, not Apple. This probably explains why AAPL will probably not find its way into the ARK portfolio now or in the near future.

Ask Twitter

Suppose you are hired to run Cathie Wood’s tech-heavy ARK Innovation ETF, a fund that seeks to invest in disruptive innovation. Would you allocate any capital to Apple stock?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Apple Maven)