ARKK vs. ARKW vs. ARKF: Which ARK Disruptive Tech ETF Is Better For Your Portfolio Right Now?

2021 has reset the expectations for Cathie Wood's ARK ETFs going forward.
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Cathie Wood has propelled the ARK ETF family from nearly nothing two short years ago to the 11th largest issuer today. The company's success has been built on its "disruptive innovation" strategy, which tends to focus on fast-growing companies in emerging industries or developing next-gen technologies. She's become a polarizing figure in the industry due to the funds' high highs and low lows, but there's little question that she's one of the most well-known names in the financial world.

The ARK Innovation ETF (ARKK) isn't the company's first ETF, but it's become its tentpole product focusing on the team's best ideas regardless of industry. Two other funds within the family - the ARK Next Generation Internet ETF (ARKW) and the ARK Fintech ETF (ARKF) - have performed noticeably better over the past year. That's coincided with the rally in tech stocks that occurred during the 4th quarter of 2020 and into the 1st quarter of 2021. These three ETFs, however, have mostly moved sideways since March.

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ARKK vs. ARKW vs. ARKF

ARKK vs. ARKW vs. ARKF

For investors considering adding one of the high flying ARK ETFs to their portfolio, does it make sense to go with the broader scope of ARKK or the more targeted approach of ARKW or ARKF? The acceleration in the migration of internet commerce due to the pandemic presents additional opportunities, while the advances in blockchain and cryptocurrencies could fuel the fintech space.

Let's put the three ARK ETFs side by side.

ARKK vs. ARKW vs. ARKF

All three funds are actively-managed and charge between 0.75% and 0.79%, so there's no real delineation on that front. ARKK is clearly the biggest of the bunch, but all three are large enough that trading costs and liquidity aren't a factor either.

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ARKK focuses on the themes of DNA technologies, the genomic revolution, automation, robotics, energy storage, artificial intelligence, the “next generation internet” and fintech innovation.

ARKW targets cloud computing, cybersecurity, e-commerce, big data, artificial intelligence, mobile technology, the internet of things, social platforms and blockchain.

ARKF invests in transaction innovations, blockchain technology, risk transformation, frictionless funding platforms, customer facing platforms and new intermediaries.

Portfolio Composition

As you might expect, all three portfolio are heavily allocated to tech stocks, but tilt their portfolios in fairly predictable ways. It could be assumed that a focus on fast growth and emerging innovation might lead towards heavier allocations to small-caps, but that's not really the case.

size-breakdown

There is a strong large-cap lean in all three, but ARKK is the one ETF out of the trio that has a heavier weighting, about 25% of total assets, to mid- and small-cap stocks.

In terms of global allocation, all three, again, are similar in that they dedicate most of their portfolios to U.S. stocks. In this case, ARKF is the outlier holding roughly 1/3 of assets in non-U.S. developed, emerging and frontier market stocks.

market-breakdown

This isn't surprising given that much of the fintech, blockchain and payment system solutions development is happening overseas, especially in Asia and even in South/Central America.

Tech and communication services stocks, of course, dominate all three funds, but not so much in ARKK. That fund has about 50% of assets in these two sectors compared to ARKF and ARKW, which have closer to 60%.

sector-breakdown

The biggest difference in ARKK is its heavy investment in healthcare at nearly 30%. This is where you find a lot of the top ideas from the ARK Genomic Revolution ETF (ARKG) in the areas of gene therapy, bioinformatics, molecular diagnostics and therapeutics.

ARKF has that 20% allocation to financials, which is where you find names, such as Coinbase, Silvergate Capital and Lending Club.

All in all, a dozen names appear in all three ETFs, led by Square, Coinbase, Teledoc Health and Shopify.

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Risk Metrics

Here's where we start to see some separation between the three (outside of just what they invest in). All three are clearly more volatile than the broader market and, in many cases, significantly more so.

ARKK is a unique case study in both the upside and downside of volatility. In its earlier years, ARK's disruptive innovation theme was very much in style and multiple funds delivered 100%+ returns in 2020 - ARKK and ARKW at around 150% and ARKF at "only" just over 100%.

2021 has been a different story though. The high growth theme dissipated and pivoted over the mega-cap growth. ARKW and ARKK both fell more than 30% and are still struggling to recover. Every ARK ETF that's been around for the entire year is still meeting the bear market definition of being down at least 20%.

Since ARKF hasn't been around for 3 years, we only have the 1-year risk metrics to look at if we want to compare all three, but the longer-term numbers for ARKW and ARKK look substantially similar to those from the short-term. The 3-year anniversary for ARKF happens in February 2022 and it might be a good idea to revisit this idea in a few more months.

Looking at beta or standard deviation, ARKK is clearly more volatile than the others. ARKW is about twice as volatile as the Nasdaq 100 (QQQ) using standard deviation as a measure. ARKF is considerably more "conservative" than ARKW and ARKK.

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The up capture and down capture ratios demonstrate how you have to expect both the good and the bad when investing in these funds. ARKK is clearly the home run swing of the three, but ARKW isn't far behind. ARKF is actually the one fund that looks a little more reasonable in terms of risk. It also rates better in terms of risk-adjusted returns and is the only one that is net positive in terms of up/down capture ratio.

For ARKK and ARKW, you have to go back to the 5-year holding period before you find an alpha figure that's positive for both funds. Whether you look at the 1-, 3- and 5-year holding periods, ARKK has significantly underperformed on a risk-adjusted basis. The roaring bull market made all of the ARK ETFs look great, but the correction over the past year is giving us a more well-rounded picture of risk/return ratios. For some of these funds, it may not be a positive picture.

I don't want to put too much weight in a limited data set, but at this point I feel comfortable saying that ARKF looks like it will be less volatile than ARKW and ARKK. That won't always be the cause in certain short-term measurement periods and returns, of course, will fluctuate, but its global diversification and heavier allocation to the financial sector actually looks to be paying from strictly a risk perspective.

Performance

ARKW is the winner across the board here. The deeper correction in ARKK over the past year actually puts it significantly behind both ARKW and ARKF on a 1-year basis and behind ARKW over the longer-term.

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ARKK accounts for half of all ARK assets under management, so it accounts for the biggest moves in terms of net flows, but looking at AUM changes over time, ARKK is actually holding up the best. Its asset base has shrunk about 29% from its peak, but that compares favorably with the 35% fall for ARKF and the 47% figure for ARKW. Performance hasn't been the driving factor since ARKW and ARKF have both outperformed. It may be ARKK's brand recognition and pure investor preference that are driving the differences.

Conclusion

The ARKK vs. ARKW vs. ARKF debate will obviously depend a lot on which segment of the market you want to target. ARKW gets you more pure play tech exposure and should benefit over time from the proliferation of e-commerce, online payments and the work-from-home trend. ARKF is positioned for the continued growth in cryptocurrencies and blockchain. ARKK has the simple strategy of offering up the company's "best of the best" ideas.

If I'm forced to choose just one, I think I'm leaning towards ARKF here. With the market pivoting towards cyclicals amid an environment of rising interest rates, higher commodity prices and increasing inflation, the rotation out of growth may be sustainable and that means you probably want a little less risk exposure. That means ARKF.

I'm also a believer that we're still in the early stages of the fintech boom. There's still a lot of adoption to be made on the crypto side and companies are only getting started with how to integrate blockchain and defi into their platforms. Growth opportunities longer-term, I feel, are better in this sector.

ARKK, of course, offers a more diversified portfolio, but we're starting to see that the high risk nature of the ETF may not pay off as well over the long-term. 2021's performance brought all of the performance and risk/reward metrics for the ARK ETFs back to earth, but ARKK seemed to suffer a particularly cruel fate. I wouldn't abandon the ARK ETFs as an investment choice altogether, but I do think expectations need to be adjusted.

For me, it's ARKF over ARKW and ARKK for the time being.

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