Wild shares of S&P 500 titan Tesla aren't the big problem facing one of its top holders this year: Cathie Wood's ARK Invest. The much-watched ARK Innovation ETF is getting passed up by some pretty routine funds.
ARK Innovation, which holds more than $12 billion in assets with a strategy to own companies revolutionizing the world, is slipping in performance. Dozens of diversified ETFs have outperformed the well-known ETF over the past two years. That's besmirching a stellar five-year record and prompting some to wonder if the extra risk is worth it.
Here's the salt in the wound. Investors who simply bought the Invesco QQQ Trust, which owns the 100 largest non-financial stocks on the Nasdaq, are up more than 54% in two years through Jan. 26. That easily outperforms ARK Innovation's 30.7% gain in that time.
And that's just one example. Roughly 50 large diversified ETFs, or 25%, passed up ARK Innovation's annualized returns in the past two years, says Morningstar Direct. Even the value of prudent Warren Buffett's Berkshire Hathaway shares are up 36.2%, topping ARK Innovation's gain in the past two years. And ARK Innovation is now just even with the S&P 500.
"CFRA has been cautious on ARKK for the last nine months ... a period during which the ETF underperformed the broader market and many ETF peers," said Todd Rosenbluth, head of mutual fund and ETF research at CFRA. "We continue to believe there are better alternatives to start 2022."
ARK Invest: Slipping Vs. The S&P 500
ARK Invest is chock full of speculative companies Wood thinks will drive the future. But those types of companies, some of which don't make money yet, are out of fashion. Investors are looking for more sure bets amid higher inflation, such as S&P 500 energy stocks.
Compugen, a money-losing medical therapy developer, is the worst-performing current holding in ARK Innovation's portfolio in the past two years. It lost roughly half its value in two years. And just this year so far, it's down more than 18%. However, it's only a tiny stake, 0.2%, in the portfolio.
Teladoc Health, a provider of online medical consultations, is a bigger blow. It's roughly 7% of the portfolio. Unfortunately, the stock is down 29% in two years and off 24% just this year.
Even ARK Innovation's top holding at 8.2%, Tesla, isn't able to make up for other positions that are sinking. Tesla is up a whopping 728% over the past two years. But it's off more than 11% this year so far.
Worst-Performing Current ARK Innovation Holdings
| Company | Symbol | 2-year % ch. | YTD % ch. | Weight (%) in portfolio |
|---|---|---|---|---|
| Compugen | -47.0% | -18.6% | 0.17% | |
| Invitae | -44.8% | -33.7% | 1.46% | |
| Editas Medicine | -37.2% | -32.9% | 0.22% | |
| Teladoc Health | -29.1% | -24.2% | 6.51% |
Sources: IBD, ARK Invest, S&P Global Market Intelligence
Lesser-Known ETFs Pass Up ARK Innovation
Not a single ARK ETF is among the top 50 total return diversified ETF performers in the past two years. No. 1 is Invesco S&P SmallCap 600 Revenue ETF with a 34% annualized two-year total return. The ETF owns roughly 600 small companies and weights them based on their revenue. It's loaded up with 21% in consumer cyclical stocks and 11% in energy.
Perhaps more telling is how the Invesco QQQ Trust pulled ahead of ARK Innovation with a 25.2% annualized total return in two years. More than half the QQQ is simply invested in the 10 most valuable non-financial stocks on the Nasdaq.
Another sign of the shift in ETF performance, the Pacer U.S. Cash Cows 100 ETF is topping ARK Invest with a 26% annualized two-year return. It owns roughly 100 companies that throw off lots of cash, but are hardly revolutionary. Top holdings include Exxon Mobil and Altria.
And the Tuttle Capital Short Innovation ETF, ironically designed to bet against stocks ARK holds, is now up more than 33% this year. ARK is down 27%.
But it's important to note ARK Invest's long-term record is still superb. It's still up an impressive 28.0% annualized in the past five years, topping the 15.7% annualized return of the S&P 500 and 23.4% return of the Invesco QQQ.
"Investors have remained relatively loyal, having confidence in the long-term prospects for the active ETF," Rosenbluth said. "We expect some investors will have renewed confidence that 2022 will be a year of improvement."
Lost ARK
Ark Innovation is no longer a top 10 diversified ETF in the past two years.
| ETF | Ticker | 2-year annualized total return | Expense ratio |
|---|---|---|---|
| Invesco S&P SmallCap 600 Revenue | 33.7% | 0.39% | |
| Cambria Shareholder Yield | 28.2 | 0.59 | |
| Invesco S&P 500 High Beta | 27.1 | 0.25 | |
| Invesco S&P SmallCap Value with Momt | 26.9 | 0.39 | |
| Pacer US Cash Cows 100 | 25.8 | 0.49 | |
| Invesco QQQ Trust | 25.2 | 0.20 | |
| Pacer US Small Cap Cash Cows 100 | 24.3 | 0.59 | |
| iShares Russell Top 200 Growth | 23.5 | 0.20 | |
| Avantis U.S. Small Cap Value | 23.3 | 0.25 | |
| HCM Defender 100 Index | 23.3 | 1.11 | |
| ARK Innovation* | 16.8 | 0.75 | |
| S&P 500 | 16.8 |
Sources: IBD, ARK Invest, S&P Global Market Intelligence, Morningstar Direct through Jan. 26, * - shown for comparison
Follow Matt Krantz on Twitter @mattkrantz
