Quirky Working In These Active ETFs

July 10, 2017

All four ETFs have blown away our sector benchmarks over one year—particularly ARKK, which outpaced the MSCI ACWI + Frontier Markets Investable Market Index by 28%. ARKK doesn't look anything like that benchmark though; instead, it features high allocations to tech stocks, health care and consumer cyclicals.  

Compare that to the purest-play ARK ETF, ARKG. With 67% of holdings in biotech and another 21% in health care, ARKG's portfolio most closely matches the traditional concept of a sector ETF (namely, biotech). And interestingly, ARKG's performance also most closely tracks market performance—though it’s still beaten our sector benchmark by 9% over the past year.

Narrow Mandates

There's an additional complication. ARK's funds have unique and extremely narrow mandates to satisfy, yet many qualifying companies are so huge that these particular business lines represent a paltry fraction of their revenues.

Take ARKQ, the automation fund; its largest holding is Tesla (11%). Yes, Tesla dabbles in self-driven cars, but it's also a car company, first and foremost, and thus subject to automobile industry trends.

To be sure, this problem isn't unique to active ETFs; index thematic ETFs struggle with the mandate question as well. (Staudt says ARK compensates by weighting companies according to their "thematic relevance," among other metrics.)

But it could partially explain why ARK's ETFs have walloped our benchmarks so soundly—and why ARKG, whose portfolio more closely mirrors a traditional sector—has posted humbler outperformance.

 

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