ARKK is the largest actively managed Exchange Traded Fund in the US. Its performance since its inception has been short of exceptional. It’s widely popular among investors. If you just heard about it then let’s dive in together to determine if it’s still a good time to buy! Or time to stay away from the bubble that can be caused by some its overvalued holdings.
ARK philosophy is built around investing in disruptive technologies. It means it’s looking to invest now in the technologies that will dominate the future. So far, the fund manager Catherine D Wood has been successful at her choices and the ETF has become widely known among investors as one of the best performing ETFs out there.
As per the prospectus, ARKK is an actively managed ETF that seeks log-term growth. At least 65% of its assets have to be invested in it’s theme which is DNA technologies (‘‘Genomic Revolution”), industrial innovation in energy, automation and manufacturing (‘‘Industrial Innovation’’), the increased use of shared technology, infrastructure and services (‘‘Next Generation Internet’), and technologies that make financial services more efficient (‘‘Fintech Innovation’’).
Basic info about ARKK ETF
Expense ratio 0.75%
Inception date 10/31/2014
Number of holdings 35-55
|Name||Ark Innovation ETF|
|AUM in M||16,340|
Note: Past performance does not guarantee future results.
ARKK ETF Top 10 Holdings
|TELADOC HEALTH INC||6.14%|
|ZOOM VIDEO COMMUNICATIONS-A||6.10%|
|COINBASE GLOBAL INC -CLASS A||4.76%|
|UNITY SOFTWARE INC||4.59%|
|SPOTIFY TECHNOLOGY SA||4.20%|
|TWILIO INC – A||4.16%|
|EXACT SCIENCES CORP||3.92%|
|INTELLIA THERAPEUTICS INC||3.79%|
ARKK ETF Methodology
To better assess if ARKK is a good ETF to buy, we have to look into:
- MER: The management expense ratio for this ETF is really low (0.75%) considering it’s an actively managed fund (not just an ETF tracking an index).
- The holdings: The list is shown in the table above and includes some household names in addition to other less known to the public technology companies. In my analysis I will focus on its top holding which are Tesla inc and Roku Inc.
The performance of Tesla Inc Shares has definitely helped ARKK reach amazing returns in 2020. The enthusiasm for Tesla reminds many analysts of a pre-bubble phase. The stock is trading at a valuation that is very difficult to justify with its financial ratios:
Price / Earning ratio for Tesla: 175x
Price / earning ratio (average whithin its industry): 15x
The numbers speak for themselves, Tesla has a Price / Earning ratio that is way over the industry average. To be able to value a company, you need to determine its future earnings and its growth rate in the future. At the current valuation, Tesla needs to post insane profits in the coming years which is realistically unlikely. Just a reference Tesla started the year 2020 with a market capitalization of $81 B and ended the year at $420 B. On December 2020, it made its entry to the S&P500. This means Tesla shares will have to be purchased by all index fund managers who track the S&P500. This will for sure help Tesla shares be more stable as a good portion of its shares will be held by institutional investors. Many analysts believe though that the entry to the S&P will help a bit but only in the short term. The performance of the company will reside on its ability to deliver on its upcoming new car Model Y. Also, Tesla needs to up significantly its sales for her autonomous driving software to convince the market. Software sales were key in making Tesla profitable in the past years because of their high margin.
In short, Tesla needs to maintain investors hope really high to keep its current valuation. Any unexpected drop in sales or issues with its new model will shake investors’ confidence. We need also to keep in mind the competition which is working hard to catch up to Tesla in the electric vehicle segment.
Compared to its lows of March 2020, Roku’s shares have had a terrific ride (Up 420%). The fact that the company posted losses in 2020 did not discourage investors. The growing number of Roku’s daily active users seems to be the main driver. Many analysts expect the company to increase its revenues at the expense of traditional media content.
Roku is expected to meet expectation because:
- Growth in sales of Roku smart tv’s;
- Roku’s acquisition of new content such as Quibi’s;
- Growth in ad revenues.
As you can see above, Tesla Inc which represents 10% of ARKKs holdings have a questional valuation. This could slow some of the futur returns. However, one should note that the main aspect of an actively managed fund is the quality of its manager. ARKK has consitently out performed the index since its creation. So, the recent performance is not a coincidence. We recommend a buy and hold strategy because of the long term return potentiel.
Please see other posts you might be interested in!