ARK is in the news all the time, and Cathie Wood’s investment decisions are watched like a hawk by the financial media. Her flagship fund is down more than 47% year to date, but it still saw about $850 million in inflows during the first four months of the year.
There’s an ETF that looks to deliver the inverse of the daily return of the ARK Innovation ETF (ARKK). Launched in the final quarter of 2021, the Tuttle Capital Short Innovation ETF (SARK) already has almost $380 million.
Investors might flinch at essentially betting against innovation, but they might also shy away from making highly concentrated bets in the disruptive innovation space. There are a few alternatives in the ETF space, including the iShares Exponential Technologies ETF (XT).
XT launched less than six months after ARKK, in March 2015, at the request of Ric Edelman, the founder of Edelman Financial Engines. He wanted a vehicle that would provide his clients with exposure to next-generation technologies and asked iShares to create the product based on his research. Today, it is a $3.4 billion fund, while ARKK has $10.2 billion in assets under management.
Ric Edelman has put his money where his mouth is, with his firm holding more than one-third of the fund as of the end of last year, presumably in client accounts.
When it comes to trading, you’re looking at a 0.75% expense ratio for ARKK versus 0.46% for XT. ARKK has deep liquidity, with $1.4 billion in daily average dollar volume versus just $10.8 million for XT, which is still plenty of liquidity. Keep in mind, it was designed specifically as a buy-and-hold vehicle.
Digging Into Holdings
Let’s be clear, while these funds both seek to expose their clients to high growth technologies at a global level, they are very different. While XT takes a broad, passively managed approach, ARKK is very actively managed, taking highly concentrated positions.
While XT has roughly 200 holdings, ARKK has 35. Nine of ARK’s holdings, representing 42% of the portfolio, are held in XT, where those same stocks have a combined weight of less 3%. XT’s top 10 holdings represent 8.49% of its total portfolio, while that figure is 58.7% for ARKK.
ARKK’s top three holdings include Tesla at 9.45%, Roku at 7.82% and Zoom at 7.72%. XT’s top three holdings are CF Industries Holdings at 1.05%, Shanghai Junshi Biosciences at 1.05% and Exelixis at 0.84%.
ARKK also has a fairly limited country exposure in that it is largely focused on U.S. listings, with a domestic weighting of more than 98% and additional exposure to Singapore and Belgium. Meanwhile, XT’s top 10 countries represent roughly 91% of the fund’s total portfolio, with the top three including the U.S. at 63.58%, Japan at 6.67% and Hong Kong at 5.51%.
When it comes to sectors, XT and ARKK both have technology services as their top allocation, with the sector representing roughly one-third of XT’s portfolio and nearly half of ARKK’s. The second largest sector allocation is also the same for both funds, with health technology representing 24% of XT’s portfolio and 22.5% of ARKK’s.
XT’s third largest sector is electronic technology at 20.7% of its portfolio, while it has a weighting of 1.09% in ARKK. That fund’s third largest sector is consumer durables at 18.3%, which is not included in XT’s top 10 sectors.
Unsurprisingly, the significant differentiation between the two portfolios means their factor exposures are also very different, though those exposures are almost all negative loadings. However, ARKK’s exposures have significantly greater magnitude than XT’s.
For example, ARKK has a -2.37 exposure to the low volatility factor, which isn’t surprising given its concentrated portfolio and intense focus on disruption. XT’s exposure to the same factor is -0.36. Similarly, the momentum factor exposures for the funds are -1.87 and -0.29, respectively.
ARKK has a -1.39 exposure to the quality factor, but XT is neutral. The one positive exposure for both funds is low size, with ARKK’s exposure at 1.09 and XT’s at 0.41.
XT has a -0.41 exposure to the yield factor and a -0.29 exposure to the value factor. Those exposures are again intensified for ARKK, which has exposures of -0.76 for yield and -0.95 for value.
XT’s broader portfolio means it is significantly less volatile than ARKK. It’s down 7.35% during the past three months versus a nearly 28% decline for ARKK during the same time period. Year to date, that gap widens even more, with ARKK down nearly 45% and XT down just 18%. Over the 12-month period, the performance differential expands further, with ARKK down a stunning 53.3% and XT down less than 10%.
When it comes to annualized performance, XT has a 12.6% return versus ARKK’s 3.7% return for the three-year period. But over the five-year period, XT trails, with an annualized return of 13.3% versus XT’s 17.2%.
If you look at Morningstar’s annual numbers for the funds’ performance, you get a better idea of the extremes. XT’s price return is much steadier, with a range of annual price returns from -4.88% in 2021 to 35.09% in 2020. The range for ARKK is almost implausibly dramatic, with a 23.38% plunge in 2021 and a breathtaking return in 2020 of nearly 157%.
XT Annual Price Return
ARKK Annual Price Return
You can see ARKK’s dramatic recent decline during the 12-month period in the chart below.
But over the longer term, ARKK exhibits outperformance relative to XT. The chart below covers the five years ended May 4.
These two funds have a correlation coefficient of 0.9045 from May 31, 2017 through May 6, 2022, which is pretty high. But when you look at each fund’s correlation with the iShares MSCI ACWI ETF (ACWI), the correlation for XT is 0.9838 for XT but 0.8306 for ARKK.
Both XT and ARKK have outperformed ACWI over the longer term, but XT’s excess returns relative to the broader benchmark fund have been smaller and steadier. ARKK’s returns have been far bigger and far more volatile, even if investors have still ended up ahead of both ACWI and XT over the five-year period.
Clearly, disruptive innovation is a theme with an edge relative to the broad market, but when looking at the funds, investors have to decide how much they believe in ARK’s active stock selection going forward versus XT’s broader and more incremental approach to exploiting that edge.
Contact Heather Bell at [email protected]