of ARK Next Generation Internet ETF (NYSEARCA:ARKW) is on track for a comeback, with its actively managed equity strategy returning 55% over the past year and outperforming tech-heavy benchmarks like the Nasdaq 100 (QQQ).
This momentum has at least some effect This is retribution to long-time shareholders who experienced a period of extreme volatility where ARKW experienced a -80% drawdown through 2022 after the post-pandemic crash. The last time we covered this fund was in his 2020. sales evaluation At the time, and in fact, the stock price is still down -20% since then.
Although ARKW still holds many of the same shares as it did four years ago, we see a new focus on digital assets and blockchain technology, which is central to the “Next Generation Internet” theme. This positioning as a big bet on Bitcoin (BTC-USD) and the cryptocurrency market This year has seen an increase in capital, but also added concentration risk.
At the end of the day, ARKW still has a lot to prove to rebuild its stock-picking credibility. We are not confident that our current portfolio will continue to be a long-term winner, and we expect volatility to return in the future.
ARKW’s big bet on digital assets
ARKW invests in companies that are expected to benefit from Internet-based products and services. The strategy here is wide-ranging, and Ark Invest's management has few constraints on the types of technology companies it creates, covering everything from big data and artificial intelligence, cloud computing, cyber security, e-commerce and social. It is now possible to build a portfolio without media, mobile technology and blockchain.
Coinbase Global, Inc. (COIN) is its largest holding with a weight of 10%. This is followed by the ARK Bitcoin ETF, which also makes up 10% of the fund, referring to the company's proprietary ARK 21 Shares Bitcoin ETF (ARKB), which tracks the spot price of Bitcoin.
Including companies with high exposure to crypto trading, such as Block, Inc. (SQ) and Robinhood Markets, Inc. (HOOD), in the third and fourth positions, nearly one-third of the portfolio is directly or in digital assets. Indirect bet.
Naturally, this setup implies that ARK has a high level of belief in cryptocurrencies, which is fine, but it does mean that future investors have no idea what they're getting into. It's also important to recognize.
At the bottom of the list, the portfolio, with a total holding of just 46 stocks, is comprised of a mix of large tech leaders and more emerging stocks. Tesla, Inc. (TSLA) Meta Platforms, Inc. (META), Cloudfare, Inc. (NET), DraftKings Inc. (DKNG), Palantir Technologies Inc. (PLTR), The Trade Desk, Inc. ( TTD), MercadoLibre , Inc. (MELI), etc.
Overall, the different types of companies represent the “Internet” theme well, but the names of the major blockbuster technologies are particularly excluded. As a result, ARKW offers a distinct return and risk profile.
ARKW's performance
We mentioned that ARKW has performed well over the past year, but this doesn't tell the whole story. The fund has delivered a cumulative return of 369% since its founding date in 2024, significantly exceeding QQQ's return of 371% over this period. ARKW is well ahead of its fellow fund family member, the ARK Innovation ETF (ARKK), but with a broader approach that goes beyond just internet technology.
At the same time, ARKW has lagged behind the Technology Select Sector SPDR ETF (XLK), which returned 479% over a nearly 10-year period, which we believe is the better performance benchmark. In this case, active management strategies were unable to keep up with index funds that track tech stocks within the S&P 500.
We can also say that based on its performance history, ARKW tends to outperform on the upside in bull markets. In 2020, the fund returned him an impressive 157%.
Moving on, it's been an even tougher record of late, with ARKW still down -45% over the past three years compared to XLK's 55% return. We found that many of the stocks ARKW has invested in prior to 2021, which reached extreme valuations at the height of the pandemic-era boom, have so far failed to live up to expectations. Thing.
The main issue with ARKW is that despite being actively managed with the flexibility to regularly adjust the portfolio, many of its holdings are down -60% or more from their highs. This means the team failed to identify some key market tipping points or company-specific fundamental factors that could have been better managed.
Therefore, valuations have reset low, and while there is still potential for these stocks to rise further, it could be a long road back to all-time highs.
We would like to go a step further and argue that the performance here is insufficient evidence of Ark's stock-picking ability, which has not generated the excess level of returns necessary to warrant an expense ratio of 0.87%. think. In this regard, it is also worth noting that ARKW's year-to-date performance has been underperforming.
What’s next for ARKW?
The problem you see with ARKW is that by trying to touch on different corners of internet innovation, its strategy spreads thin and misses out on being strong in one key area.
The bullish case for the fund based on today's allocation is that crypto-related stocks like Bitcoin and Coinbase continue to rally and outperform given the fund's overweight exposure to the segment.
Still, investors who are extremely bullish on Bitcoin and cryptocurrencies may want to consider VanEck Digital Transformation ETF (DAPP) or Bitwise Crypto Industry Innovators ETF (BITQ) to represent their strategic or crypto strategy. We argue that a more focused fund, such as , would be better served. tactical perspective.
On the other hand, the rest of the portfolio, which is a selection of unrelated software and Internet names, does not necessarily stand out as a combination that will lead the overall market higher.
What is also likely to happen is that the ARKW portfolio through high-beta names faces further declines in a risk-off environment and underperforms more diversified tech and growth indices.
This bearish scenario could develop through some macro deterioration in which financial conditions become more volatile once again. There is also a path for Bitcoin to decouple from technology and correct downwards, which would be a drag on ARKW's exposure.
final thoughts
With nearly a decade of experience, we don't think ARKW is a better option for investors than the average low-cost index tech or growth fund.
Despite the fund's rise over the past few months, ARKW remains a speculative fund and could face higher levels of volatility in the next down market. Our request is for ARKW to underperform the benchmark going forward.
The strategy's heavy focus on cryptocurrencies over the past year has shifted the fund's risk profile beyond the traditional tech sectors that investors should be aware of.