ARK-Invest: Keep an eye on “active” ETFs

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Written By Kampretz Bianca

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Boss with cult status

ARK-Invest is little known in Germany, but the fund company’s boss, Cathie Wood, enjoys something of a cult status among US stock fans. The former investment banker and asset manager is very active on social media and represents a bold investment style that carries significantly greater risk. She has had her own fund company, ARK-Invest, since 2014.

ETF without benchmark

ARK-Invest ETFs are now also traded on German stock exchanges. This has been the case with ETFs from niche provider Rize, which ARK-Invest recently took over. Unlike the Rize funds, the three ARK-Invest products currently available for purchase are actively managed ETFs. Therefore, they do not follow a stock market index, but are similar to classic investment funds, in which managers make a targeted selection of shares. Main difference: At 0.75% per year, ARK-Invest ETFs have significantly lower costs than actively managed “normal” equity funds and are easy to buy on the stock exchange.

Flagship with a list

The ARK Innovation ETF is considered the company’s flagship. He trusts joint-stock companies that promise “disruptive innovations”, that is, shaking up existing markets based on new technologies. Automaker Tesla fits this investment idea, as does the current largest fund position Coinbase Global, a cryptocurrency trading platform. With this concept, a wide range of sectors and countries is difficult to reach and not at all desired.

Unglamorous performance

In the early years, the ARK Innovation ETF concept, founded in 2014, was a success, but since spring 2021 the worm has been up and running. An average performance of 9.8% per year (in US dollar terms) doesn’t sound bad, but the world-famous Nasdaq-100 tech index has more than doubled since 2014 to 17.7% per year – and that’s at risk much smaller: The extent of value fluctuations, the so-called volatility, was 37% for the ARK ETF, compared to 22% for the Nasdaq-100.

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Disadvantages of Stock Picking

The ARK Innovation ETF example shows the dark side of targeted stock selection, known as stock picking. No reasonably well-known technology stock has performed as brilliantly over the past year as graphics card company Nvidia. Cathie Wood kept the shares in her portfolio for a while, but sold them again before the incredible price rally. This cannot happen with ETFs that track just one index, like the Nasdaq-100.

What does “active” ETF mean?

According to the European securities regulator Esma, a financial index must be calculated independently of the ETF provider and based on a clear set of rules, it must disclose its calculation method and also publish its composition in a free and accessible way to everyone; for example, mixed funds or clear strategy ETFs have rules for their composition and are practically passive, but they cannot be called that because they do not reflect a financial index.

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Other ETFs define the stocks they can invest in based on an index. But then, for example, they only look for the most sustainable stocks in this index, possibly trying to deviate little from the development of the index. This is also “active”. ETFs like Ark Innovation do not differ in their strategy from classic actively managed funds.

Only suitable as an additive

With ETFs and active funds, investors are required to regularly monitor developments and, if necessary, take action if the fund performs unexpectedly poorly. This means you lose the decisive advantage of market-wide ETFs. This means that products like the ARK Innovation ETF are only acceptable as a portfolio addition with manageable weight. Furthermore, all three ARK Invest ETFs offered in Germany follow strategies that are so special that they can only be suitable for investors willing to take risks.

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