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Cathie Wood’s ARK Innovation ETF: 3 Reasons To Pay Close Attention

The ARK Innovation fund has been struggling lately. Here are 3 interesting facts that may help investors decide whether to own or take a pass on Cathie Wood’s flagship ETF.

Famed investor Cathie Wood’s ARK Innovation ETF  (ARKK) - Get ARK Innovation ETF Report has been heavily debated lately. The fund is down nearly 25% since the start of November alone, and investors seem skeptical: is the ETF overvalued, and should it be sold? Or might it be a good buy-on-dip play instead?

Today, Wall Street Memes looks at three interesting facts about the ARK Innovation ETF that may help investors to make up their minds.

Figure 1: ARK Investment Management on NYSE.

Figure 1: ARK Investment Management on NYSE.

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#1 Not at all like the usual tech ETF

Investors thinking of buying ARKK ETF should understand how it differs from most other tech ETFs. Take the Nasdaq 100  (QQQ) - Get Invesco QQQ Trust Report, for example. According to etfrc.com (see charts below), only 7% of ARKK’s and QQQ’s holdings overlap. Most interesting, Cathie Wood’s ETF does not hold any share of the famous FAAMG stocks: Meta, Amazon, Apple, Microsoft and Alphabet.

The overlap is even smaller between ARKK and the Technology Select Sector SPDR ETF  (XLK) - Get Technology Select Sector SPDR Fund Report. Only Trimble Navigation  (TRMB) - Get Trimble Inc. Report, at an allocation of less than 1%, is a common holding between the two funds.

Figure 2: ARKK vs. QQQ and XLK overlap by weight.

Figure 2: ARKK vs. QQQ and XLK overlap by weight.

Also worth noting, ARKK’s performance correlates with those of QQQ and XLK at a fairly low ratio of only +0.75. Therefore, it is reasonable that Ms. Wood’s high-growth stocks could be owned alongside other equity indices and ETFs — and not only as a replacement for them.

#2: In a COVID-like bear

Cathie Wood has been emphatic that her fund and its high-growth stocks are not in a bubble. The manager’s argument is simple: “our strategies would be flying if we were”.

She seems to make a good point. Sure, the ARK Innovation ETF has been up around 120% since the bottom of the COVID-19 bear, more than the S&P 500 and the Nasdaq. But the chart below shows that the fund could set a record-sized pullback from a peak any moment.

Last year, ARKK dipped as much as 42.5% during the market meltdown. Now, the ETF shares are already 41% lower than the February 2021 all-time high. Investors looking for a “holiday deal” may find the current discount attractive.

Figure 3: ARKK maximum drop from a peak.

Figure 3: ARKK maximum drop from a peak.

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#3 Rewards come with substantial risks

For most of last year, Cathie Wood was heralded as one of the most talented investment managers in the industry. This is no surprise: ARKK returned a whopping 153% in 2020 alone, over three times more than the Nasdaq 100’s already impressive 48%.

But a closer look at the data shows that the ETF’s gains have not come without substantially higher risks as well. Since the fund’s 2014 inception, ARKK has delivered about 4 percentage points of annual returns above the tech-rich Nasdaq index. However, volatility (a measure of risk) has been a whopping 14 percentage points higher.

One would need to ignore ARKK’s tough 2021 to see risk-adjusted returns that are comparable with the Nasdaq. At least so far, investors who have bought into Cathie Wood’s investment philosophies have had to accept much more risk to produce higher returns.

(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 Wall Street Memes)