Call it a “fund of personality,” when you’d like. Some investors who hold Ark Investment Management’s ARK Innovation ETF (NYSEARCA:ARKK) are within the trade just because they consider in the corporate’s CEO, Cathie Wood. The fund and its founder are each headline grabbers, but undoubtedly, not every shareholder is pleased with the ARKK ETF’s recent volatility.
The old saying that volatility brings opportunity may or may not apply here. In any case, simply because an asset’s price is down doesn’t necessarily mean it’s a bargain. Still, for investors preferring stocks and firms with certain characteristics, it is likely to be an opportune time to “get on board the ARKK,” so to talk.
Are you down with the blockchain?
First things first: when you’re going to carry the ARKK ETF, you’d higher be a fan of the blockchain and cryptocurrency. Wood is an unabashed crypto super-believer, having suggested that Bitcoin (BTC-USD) will rally to $3.8 million.
Consequently, it is smart that the ARKK ETF includes numerous blockchain-friendly components. Indeed, stock holdings within the fund’s top 10 by weighting include Coinbase Global (NASDAQ:COIN) and Block (NYSE:SQ) in addition to Robinhood Markets (NASDAQ:HOOD), which facilitates the trade of each stocks and cryptocurrencies. Plus, there’s Roblox (NYSE:RBLX), which could possibly be considered a metaverse company.
Apparently, Wood and Ark Investment Management really like Coinbase. COIN stock comprises 10% of the ARKK ETF’s holdings. Once we add SQ and HOOD stocks to COIN, that’s greater than 20% of the fund.
After all, you don’t need to agree with Wood’s $3.8 million Bitcoin price prediction to own the ARKK ETF. It definitely helps, though, when you’re a blockchain bull on some level.
This implies having the ability to handle a measure of volatility. To a certain extent, Coinbase stock follows the value moves of Bitcoin, and Bitcoin is a quick mover. Notably, COIN stock’s five-year monthly beta is 3.42, which mainly signifies that the stock moves over 3 times as fast (in each directions, mind you) because the benchmark S&P 500 (SPX) index. And again, this stock represents 10% of the fund’s weighting.
Selecting momentum over value
You might have heard about Wood and Ark Investment Management buying Tesla (NASDAQ:TSLA) stock when it was down. Don’t get the improper idea from this. Wood might sometimes be a dip buyer, but this doesn’t routinely make her a worth investor.
By and huge, the ARKK ETF’s top 10 holdings are momentum stocks, not value stocks. Take Tesla stock, for instance. That is the fund’s second-biggest holding, at 8.5% of ARKK’s weighting.
TSLA stock has definitely dipped this yr, to date. Yet, this doesn’t make the stock a bargain. Currently, Tesla’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio is 37.55. For reference, the sector median P/E ratio is 17.1.
Meanwhile, Coinbase, which has more weight within the ARKK ETF than Tesla, is the exact opposite of a bargain. Imagine it or not, Coinbase’s P/E ratio is sort of 600, versus 10.66 for the sector median.
Wait — it gets worse. As of this writing, Square’s P/E ratio is 4,579.72. But then, if Bitcoin goes to $3.8 million, what difference does it make? We are able to all be blockchain millionaires if Wood’s thesis is correct.
The purpose here isn’t to mock Wood but to alert prospective investors that the ARKK ETF isn’t ideal for strongly value-focused folks. If momentum is your thing, perhaps you’ll be willing to overlook the sky-high valuations of a few of the fund’s holdings.
The risks of risk-on assets
Even greater than momentum (and, for that matter, greater than “innovation”), I’d say that the common theme of the ARK Innovation ETF is risk-on. The fund’s constituent stocks will perform well when the market’s in a risk-on mood; when traders are feeling risk-averse, the ARKK ETF won’t likely fare well.
As you will have noticed, it’s dangerous to be risk-on. Inflation is trending back up. The Federal Reserve might find yourself keeping rates of interest higher for longer than many stock traders expected. “Momo” (momentum) stocks have looked wobbly recently.
Nevertheless, wobbling is par for the course when you’re going to carry the ARKK ETF. There will likely be big up moves and large down moves, and currently, the trend is to the downside. Are you feeling panicky?
If that’s the case, Wood’s fund probably isn’t best for you. Nevertheless, when you’re a true-blue Bitcoin believer and may forgive triple- and quadruple-digit earnings multiples, then be happy to “board the ARKK” with a fastidiously considered share position.
Disclaimer: All investments involve risk. Under no circumstances should this text be taken as investment advice or constitute responsibility for investment gains or losses. The data on this report shouldn’t be relied upon for investment decisions. All investors must conduct their very own due diligence and seek the advice of their very own investment advisors in making trading decisions.