by Some of Ark Invest’s ETFs have significantly outperformed the S&P 500. Can Cathie Wood and her team continue their stellar performance? Most importantly, should you invest in Ark Invest?
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What is Ark Invest?
First off, what is Ark Invest? Ark Invest is an investment firm lead by Founder and CEO Cathie Wood. Ark Invest offers 6 actively managed innovation ETFs and 2 indexed innovation ETFs.
What is Ark’s Mission/Vision?
Ark Invest aims to capture long-term growth and capital appreciation created by disruptive innovation through thematic investing strategies.
“ARK seeks to capture long-term outperformance and capital appreciation created by disruptive innovation. Combining a precise research process with a thematic investing approach, ARK ETFs aim to provide access to companies with sustainable competitive advantages and strong potential to deliver attractive investment results.”
What is Ark Invest’s performance?
Most of Ark Invest’s ETFs have seen outsized returns compared to the S&P 500 Index as shown in the table below.
As you can see, over the past 5 years, the ETFs have an annualized return of between 36 and 53%, outperforming the S&P 500, which had a 16% annualized return, by a wide margin .
How does Ark Invest make money?
Each of Ark’s ETFs are subject to an annual expense ratio ranging from 0.49% to 0.75%.
In Ark’s own words:
“As a shareholder of an ARK ETF (each, a “Fund” and collectively, “Funds”) you incur two types of costs: (1) transaction costs for purchasing and selling shares; and (2) ongoing costs, including management fees and other Fund expenses.”
Ark provides an hypothetical example for each of the funds:
The net asset value of Ark Invest’s 6 actively managed ETFs (as of As of 03/31/2021 according to the Fund Details) combine for a total of over $46 billion, which by my calculation, could provide the company a yearly gross income of over $353 million.
Assets under management
One of Ark’s job descriptions states:
As of December 31, 2020, the firm managed approximately $58.2 billion assets.
It’s unclear how it managed $58 billion in December 2020, but only $46 billion 3 months later in March 2021. It could be a combination of outflows of investment or less than stellar performance in Q1 of 2021. ARKG and ARKK, two of Ark’s biggest funds, had negative returns in the Q1 of 2021 as reported on its quarterly report.
Ark’s Part 2A of FORM ADV Firm Brochure states:
“As of February 29, 2020, ARK’s assets under management totaled approximately $11,447,000,000”.
Suffice to say, to go from assets under management of $11.4 billion to $58 billion in 9 months demonstrates a massive inflow of investors piling into these funds during that time period, as they have experienced tremendous growth.
How does Ark Make Investment Decisions?
Ark claims to make investment decisions by doing both top-down research and bottom-up research.
Portfolio managers also use a scoring metrics in their decision making:
How Much Would I Have Made If I invested in Ark Invest?
Ark Invest’s annual report shows charts of how an investor would have performed if they invested in their funds.
Here’s an example of ARKK’s performance vs. the S&P 500 Index.
Here’s an example of ARKF’s performance vs. the S&P 500 Index.
Should I invest in Ark Invest?
It is clear that Ark Invest’s strategies for its actively managed ETFs are working for now.
The key word is “for now”.
No one can predict the future.
Ark Invest makes it clear by including this label on some of its charts: “Past performance does not guarantee future results.”
I’ve made the case that it is extremely difficult, and nearly impossible to beat the market in the long run. You can read more about it here.
The sad reality is that only 8% of professionally managed funds beat the market over a period of 15 years.
Ark heavily invests in innovation and tech stocks.
Ark has greatly benefitted from tech stocks being hot in 2019 and 2020.
However, being hot one year does not guarantee being hot the next year. Of 12 sectors analyzed below, tech was the 3rd worst performing sector in 2008 and 2010. It was the 4th worst performing sector in 2012.
So the question is should you invest in Ark Invest?
It depends.
ARKW had a 5-year annual return of 52%, vs. the S&P of 16% over the same time period. If you are expecting 3X market returns year after year for the next decade, I think you might be disappointed.
Beating the market one year is great. Beating the market over 5 years is phenomenal.
Doing so over 15 years would be next-level Lebron MVP status. As I mentioned earlier, 92% of managers won’t beat the market over 15 years.
Could Cathie Wood and her team be in the distinguished 8% who can pull it off?
Only time will tell.
Furthermore, we have to understand the concept of risk. Investment-grade bonds are low risk, low reward.
Some of these Ark ETFs are high risk, high reward.
Furthermore, doubters will tell you that Ark’s risk-adjusted returns are pretty standard.
It is still my Wall Street Fat Cat recommendation to invest in a heavily diversified goal-adjusted portfolio, consisting of S&P 500 index funds, bonds (potentially if you’re nearing retirement), some international ETFs, and up to 5-10% on fun stuff (riskier assets including cryptocurrencies, Ark ETFs, or whatever your heart desires).
Of course, do your own research and most importantly, enjoy life!
