Earlier this month, Ark Investment Management principal Cathie Wood asserted that the fund manager’s ARK Innovation ETF (ARKK) would see a 50% compound annual rate of return over the next five years. This assertion came shortly after Morningstar deemed ARKK the worst-performing US equity fund of Q1 2022 among all the funds in its coverage and a downgrade in its rating on account of its vulnerability for more losses.
ARK Funds’ value proposition comes from two distinct features:
The fund manager’s vision on the technology landscape that might drive their chosen stocks’ performance
The “actively-managed ETF” structure.
The second aspect is a very interesting feature in a crowded universe of ETFs. Most ETFs are “passive” instruments that track an index, which are bound by publicly-available rule-driven methodologies that adhere to a timetable for “rebalancing” the weights of their constituents (typically once every quarter) and the “reconstitution” of the entire portfolio itself (typically once a year). However, the fund managers for “actively-managed” ETFs have more flexibility in making changes to strategy and the securities they hold – provided they disclose portfolio holdings regularly.
There are quite a few other ETFs with varying degrees of overlap in the coverage given by Ark Funds that are also “actively managed”. A side-by-side comparison alongside these funds would be beneficial.
The two points mean that analysis can be done along two distinct axes. The first axis would be the realm of “technological innovation”. Here, we compare ARKK, the ARK Genomic Revolution ETF (ARKG) and the ARK Next Generation Internet ETF (ARKW) alongside:
The BlackRock Future Tech ETF (BTEK), an actively-managed ETF which provides diversified exposure to innovative companies that can shape the global economic future.
The Innovator Loup Frontier Tech ETF (LOUP), an ETF that tracks an index. The index begins equal weighted, but is adjusted with a conviction weighting that “overweights” the companies growing and projected to grow revenue, EPS, and cash flow the fastest. This index rebalances monthly and includes (but isn’t limited to) companies engaged in the development and utilization of artificial intelligence, robotics, autonomous vehicle technologies, virtual reality, mixed/augmented reality and other similarly disruptive technological innovations.
The second axis would be the “actively-managed ETF” structure. Given that ARK Funds promise growth, lets compare and contrast with the opposite, i.e. ETFs comprised of “value” stocks. Since ARKK has a large number of companies that are present in ARKG and ARKW, we’ll compare ARKK alongside:
The Avantis U.S. Small Cap Value ETF (AVUV), which invests in a a broad set of U.S. small-cap companies with low valuations and higher profitability ratios.
The Vanguard U.S. Value Factor ETF (VFVA), which uses a rules-based quantitative model to evaluate and invests in stocks with lower market valuations relative to fundamentals.
Historical Ratio Analysis
Just as with the ETF comparison in recent articles, proximate ratios are calculated in the constituent average as well as weighted average (driven by ETF constituent weight) formats over a series of one-year windows – with two additional windows to show the most recent states – in order to evaluate the ETFs.
Now, data services tend to not report ratios that are too high or too low. Given that the U.S. equity market is the most overvalued in the world, the former is more likely than the latter. With regard to PE Ratios, the proportion of tickers with unreported ratios relative to the total number of tickers will be computed. Since “active ETF” fund managers have enormous flexibility in altering the weights and fund composition, there will be no weight consideration in this metric.
The “Technology” Axis
Trends in ratio performance along the “technology” axis among these ETFs yield some interesting insights:
