The ARK Innovation ETF (ARKK) fell so sharply last year that Tuttle Capital launched a Short Innovation ETF (SARK), delivering the inverse performance of Cathie Wood’s flagship fund and capturing as much as $300 million in assets under management.
But it’s a new year, and Cathie Wood’s funds are back in vogue. Three of the 20 top-performing ETFs this year so far are ARK funds (and another is a 2X leveraged ETF amplifying the performance of ARKK).
Let’s look at what’s driving performance and whether the outperformance will last over the coming years.
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What’s Driving Performance?
ARK’s top-performing ETF is the ARK Next Generation Internet ETF (ARKW), with its nearly 24% gain since January.
Not surprisingly, Coinbase Global Inc. (COIN) has been the big winner in that portfolio, with an 86% jump this year following plans to slash its workforce. Roku Inc. (ROKU) also jumped more than 50% thanks to solid engagement metrics and ambitious expansion plans. And these two holdings alone account for more than 15% of the overall portfolio.
The ARK Fintech Innovation ETF (ARKF) came in second place with a 19% increase so far this year. But most of that outperformance also came from the fund’s 11% exposure to Coinbase Global Inc. Twilio Inc. (TWLO)—a 6.4% holding—also posted a nearly 25% comeback since January, helping boost the fund’s performance.
Meanwhile, the ARKK’s 18% gain came primarily from its 10% exposure to Tesla Inc.’s (TSLA) 70% move higher. The fund also benefited from its 7.6% exposure to Roku Inc. and 6.5% exposure to Exact Sciences Inc. (EXAS). Exact Sciences jumped 34% this year after strong fourth-quarter financial results.
Will ARK’s Unique Strategy Last?
ARK’s active ETFs have an iterative thematic investment process, which includes ‘top-down’ and ‘bottom-up’ analyses. Cathie Wood is the sole portfolio manager of these funds with an exclusive focus on ‘disruptive innovation,’ which assigns less weight to valuation and risk management than many conventional portfolio managers.
While ARKK and other funds outperformed in 2023, the long-term performance has been less impressive. For example, ARKK has an annualized return of 9.54% and a Sharpe ratio of 0.16. That compares to the SPDR S&P 500 ETF’s (SPY) 10.1% annualized return and 0.30 Sharpe ratio over the same period.
Of course, past performance doesn’t necessarily mean the future is bleak. Ms. Wood focuses solely on ‘disruptive innovation,’ not timing the market. As a result, her investment thesis may take years to play out. In that sense, they could beat market averages over the long run, like some value investing or venture capital funds.
The Bottom Line
After a rough patch last year, Cathie Wood’s ARK funds are among the top performers in 2023 so far. While Coinbase Global Inc.’s rise helped propel most of these gains, bets on Roku Inc., Twilio Inc., Tesla Inc., and Exact Sciences Inc. also paid off over the past year. So, investors looking for exposure to disruptive innovation may want to stay tuned.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
Note: Returns are as of Tuesday, March 14, 2023.
