ARKK And ARKQ: As Tech Advances, These Busted Growth ETFs May Reward Patient Buyers

seekingalpha11-25

Despite ARK's recent underperformance, I believe in the long-term potential of technological progress and disruptive tech companies, especially as the economy stabilizes and interest rates lift.ARKQ ...

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Then $9, then $12, then $22. The stock managed to hit ~$40 per share before its most recent  rally, but even staying at $40 meant a more-than-doubling on my investment, and considering the strength of the business now, $40 per share may well be left in the rearview mirror in the coming years. The journey I took with this stock during its boom and bust cycle is the same journey as many Covid-era stock investors, with this one admittedly ending more happily than others I’ve been on. But there are three big reasons this story ended well: I focused on the big picture of the innovative technology that the company was bringing to market and deploying for customers; I didn’t lose sight of the reasons that made me buy the stock, and doubled down when other investors ha","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4544":"ARK ETF合集","BK4588":"碎股","BK4585":"ETF&股票定投概念","ARKK":"ARK Innovation ETF","ARKQ":"ARK Autonomous Technology & Robotics ETF"},"translate_title":"ARKK和ARKQ：随着技术进步，这些失败的增长ETF可能会奖励耐心的买家","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ARKK":0.9,"ARKQ":0.9},"content_text":"Despite ARK's recent underperformance, I believe in the long-term potential of technological progress and disruptive tech companies, especially as the economy stabilizes and interest rates lift.ARKQ has shown better performance than ARKK, but Tesla is the top holding in both funds; Tesla's potential 70% CAGR should drive growth for both ARKQ and ARKK.While I expect significant upside for both ARKK and ARKQ over at least the next few years, I expect ARKQ to outperform ARKK while presenting less risk to investors.Risks include potential macroeconomic miscalculations by ARK, a housing crisis, or a severe economic downturn, but patient investors may still see substantial rewards.   mesh cube  Introduction In 2021, I invested in a tech company in the IT sector. My rationale was that this company is an innovative firm promising to fundamentally disrupt the underpinnings of both governments’ and corporations’ software operations, and it’s led by Americans who have experience in the tech world and a long-term view of the importance of geopolitics in planning out their customer base and business model. All this makes for a promising investment that will likely grow substantially alongside the company’s business over many years. When I first invested in this company, I bought in at ~$22 a share. I thought it was a steal, since it had been trading recently at almost twice my buy-in price. Over the next few months, the company’s stock traded flat, and then, like many hot stocks between 2020 and 2022, the boom went bust. The stock I “bought at a steal” went from discount to dirt cheap. $22 per share turned to $20, then $16, then $12, then $8. By late 2022, I had a decision to make: sell and cut my losses, since the business seemed to be underperforming and the stock was tanking, or double down, trust in the company’s business model, and hope that the stock would improve. After reading up more on the stock and reading on the reasons for the business’s struggles, I made my decision, and bought more shares at ~$8 each. So, what happened? The stock I doubled down on continued to decline, falling further like a timed countdown as 2022 gave way to 2023. $8… $7… $6… $7… Wait, $7? Yes, $7. Then $9, then $12, then $22. The stock managed to hit ~$40 per share before its most recent (possibly hype-based) rally, but even staying at $40 meant a more-than-doubling on my investment, and considering the strength of the business now, $40 per share may well be left in the rearview mirror in the coming years. The journey I took with this stock during its boom and bust cycle is the same journey as many Covid-era stock investors, with this one admittedly ending more happily than others I’ve been on. But there are three big reasons this story ended well: I focused on the big picture of the innovative technology that the company was bringing to market and deploying for customers; I didn’t lose sight of the reasons that made me buy the stock, and doubled down when other investors had given up on it; and the company continued to execute on its business and wield its superior technology/software to its advantage, adapting to the business environment along the way. The lesson I learned from this experience is that companies with innovative technology and solid management can persevere and prosper, and investors in those companies, if they keep the bigger picture in mind, can also perform well and grow their capital alongside these companies’ businesses. For this reason, I believe that only a certain kind of investor may be suited to invest in the ARK Innovation ETF (NYSEARCA:ARKK), and innovation-based funds in general. However, ARK’s active fund management has yielded subpar results over the past few years – results that have eroded many investors’ trust in the firm’s ability to provide market-beating growth over the long term. On the other hand, the ARK Autonomous Tech and Robotics ETF (BATS:ARKQ) has produced better results and seems like a much safer high-reward bet, and long-term innovation-focused investors can likely buy shares with more confidence in long term outperformance. In this article, I will explain my thoughts on ARK, its funds, and its past and possible future performance, and rate the shares of ARKK and ARKQ accordingly. ARKK and ARKQ Fund Stats and Metrics Before getting into my thesis in detail, I will run down ARKK’s and ARKQ’s statistics and metrics, and I will be referencing the 5 year chart regarding performance. The Ark Innovation ETF holds about $6 billion AUM, a far cry from its $27 billion in AUM at its 2021 peak. The fund’s price has similarly crashed, from $150 at its peak to about $50 today. The fund now significantly underperforms the S&P and the Nasdaq, the latter of which is an index that traditionally contains valuable tech companies in its holdings. After beating the S&P and the Nasdaq during the Covid money boom, ARKK started to lag both toward the end of 2021 and hasn’t caught back up. Seeking Alpha In addition to subpar performance, ARKK shares are expensive, with a 0.75% expense ratio and no dividend. Still, ARKK is liquid, trading at an average volume of 6 million shares over 3 months. Overall, though, ARKK’s stats are unimpressive at first glance. On the other hand, ARKQ has performed on par with the S&P 500 over the years even as ARKK sank, and has even managed to outperform the S&P in recent weeks. It’s less liquid than ARKK with only 70 thousand shares traded on average over 3 months, and it is also expensive with a 0.75% expense ratio, but at least in return ARKQ investors get some price appreciation from this fund, notwithstanding the fund’s AUM decline from a peak of $4 billion to $900 million currently. ARKQ is a mixed bag, but has more bright spots than ARKK. ARK – Short-Term Blunders, Long-Term Potential In late 2023, a YouTube video was published that criticized certain assumptions and predictions of the Covid-era macro environment made by ARK’s leader Cathie Wood. It makes some good points. Not accounting for interest rates seems like an odd blunder for a fund manager, since many innovative companies’ business models are rate-sensitive. Perhaps Cathie and Co thought those rates wouldn’t matter long term, so they need not be factored in, but that proved to be a miscalculation. ARK and Cathie Wood’s revisions of ARK’s growth projections downward over the years also implies an inability to translate their top-tier stock research into top-tier fund performance. Here's how I see things: Technological progress and economic progress have been pushing forward for most of recorded human history, and certainly for all modern history. The desire to innovate and produce new and extraordinary things is ingrained in humanity. For this reason, it generally pays to assume technological progress and economic progress will continue for the foreseeable future, and ARK's research, which analyzes what technological and economic disruptions are about to make a big impact on the world, is considered by many to be very high quality. Unfortunately, ARK's quality research hasn't translated to superior returns recently. The 5-year chart for most of the ARK funds shows them trading worse than the S&P. If you didn't buy the hype bubble in 2020-2021 and avoided all the ARK funds except for ARKQ, you could have made more money keeping that capital in the S&P 500, the benchmark index. Seeking Alpha However, due to the nature of technological progress, companies creating innovative tech are primed to take off permanently, as soon as the wider economy returns to normal and interest rates lift. Once those things finally occur, or perhaps a bit before, innovative companies are likely to rocket, meaning the funds are likely to rocket; so has been the case with Upstart Holdings (UPST), Carvana (CVNA), and other innovative firms. Yet neither of these firms are in ARK’s funds – perhaps another blunder by ARK, since Upstart is up over 200% in the past 12 months, and Carvana is up over 700%, compared to ARKK and ARKQ up only ~25% and ~40% respectively. Even with missteps like these, though, ARK’s 15% CAGR projection (per a Cathie Wood interview in September 2023) seems like sandbagging to me, a forced show of humility from Wood and company in the short term to acknowledge her funds' deeply disappointing underperformance. If a bubble pops in an asset class that has great potential but gets too far ahead of itself, there is a good chance that eventually the assets within will slowly return to the bubble era levels as they reach maturity, and then surpass them. Patient investors who wait may be rewarded handsomely for their time. In the Covid bubble years, Cathie Wood projected ARKK to reach $300-450 per share by around 2026. Since that seems quite unlikely, let’s say that the timeline shifts to late 2028, a 5-year time horizon after the decline in late 2023 with ARKK trading at around $40 per share at that time. That would be a CAGR of 50-60% from 2023 levels by 2028. As I have written in a previous article, Tesla Inc. (TSLA), ARKK’s and ARKQ’s largest holding, may see a price per share CAGR of much more than that (about 70%), but this may be a bit ambitious for ARK’s funds for the time being. Still, I think the long term can be quite positive. I think in 4-5 years from now, if Cathie Wood and Co keep their winners and successfully capitalize on their putatively best-in-class research, their funds could return to the 2021 highs. Considering the Covid money bubble has probably popped due to a period of aggressive interest rate hikes and quantitative tightening by the Federal Reserve, at least if you invested in the ARK funds now, you probably won't lose capital. Technological progress will march onward, providing a floor for the ARK funds' performance. As the businesses for ARKK's and ARKQ's holdings begin to mature and deliver ever-increasing economic returns, the companies' stocks should rise and lift ARK's funds with them. It won't be quick, but as with most technological and economic progress, it's more likely to occur than not to. At minimum, I expect a 15% CAGR by 2028. But a 30-40% CAGR from late 2023 levels is back on the table; after all, a 30% CAGR from 2023 to 2028 would put ARKK right back at its 2021 bubble high of $150 per share. This seems like an achievable level to return to by late this decade, especially as the disruptive companies among its holdings begin to hit their stride financially, like Tesla, Palantir (PLTR), UiPath (PATH), and Intellia (NTLA) – all of which are in ARK’s funds, and have been for some time. I would also expect most of ARK’s other funds to perform at around this level – i.e. a 30-40% CAGR for ARKF, ARKW, etc., due to ARK and Cathie Wood’s emphasis on including high-growth innovative technology companies for all the funds held. My only doubts are for ARKG and ARKQ. The biotech fund ARKG has seen the worst losses, and biotech winners are notoriously difficult to predict, so it ARKG less likely to hit the 30-40% CAGR of the other funds; meanwhile, the autonomy and robotics fund ARKQ likely has room to grow above 30-40%. With Tesla as ARKQ’s top holding, the company’s potential 70% CAGR alone could drive ARKQ higher than its ARK fund peers, and that would be on top of the momentum from the advancements of the automation and robotics sectors. According to reports, automation and robotics will likely explode over this decade and beyond, which should bode very well for the companies in ARKQ. Also, it should be noted that the combined ARK funds do have several mega caps in their portfolios. In fact, Meta (META), Alphabet/Google (GOOG) (GOOGL), Microsoft (MSFT), and others mentioned in the bearish 2023 video are still listed among ARK’s holdings, so the funds do have that going for them in case the famous FAANG/Magnificent Seven mega caps do end up being frontrunners in the next wave of disruptive tech. In other words, ARK can always redirect capital to companies like these if the mega caps do show signs of becoming (or rather, remaining) long term leaders in disruptive technology. To close this section, yes, ARK and Cathie Wood have disappointed and underperformed, but bubbles make a mockery of all who believe in the hype of the boom cycle. The Covid bubble has burst by now, and as disappointing as the ARK funds’ performance has been the past few years, past performance is not a guarantee of future results. This is good for ARK, since it means the next phase of growth may be more sustainable. With ARK’s funds recovering and climbing back slowly but surely, and disruptive technology continuing to advance, there are signs ARK’s funds may yet become winners again, particularly ARKK and ARKQ. Risks to Thesis ARK and its leaders have disappointed before; I cannot say with certainty they will not disappoint again. Disruptive technology has been the ARK funds’ focus for many years, yet they have managed to underperform the S&P for quite some time. If ARK miscalculates on an important macro factor in its performance estimates and allocation strategy, and if ARK misallocates its capital to its investors’ detriment like selling up-and-coming winners and buying too many losers, ARK may see underperformance that catalyzes rapid outflow of capital from its funds. Another risk is that a housing crisis triggers a decline in the economy or slows its growth, which would curb customers’ and companies’ appetite for products and services from innovative companies, bringing down the performance of ARK’s holdings and ARK’s funds along with them. Problems in the housing market appear to be structural in nature, and may negatively impact consumers and their spending habits until those structural issues are addressed. Finally, there is a risk discussed by Seeking Alpha contributor Avi Gilbert that could severely affect the economy. For some time, Mr. Gilbert has had the macro thesis that the US financial sector is actually in a worse condition than it was just before the Great Financial Crisis; tangentially, his technical analysis of markets over periods of decades and centuries leads him to conclude that we may see a years-long bear market begin in the near future. If either or both of these theses are correct, the economy may see a more severe decline that does not lend itself to fostering the products and services of innovative companies; it should be noted, though, that it is also possible that a severe and prolonged economic downturn could make some companies more willing to try experimental cost-saving products to improve profitability, giving disruptive tech companies an underlying source of demand. For the record, I am not certain how likely it is that Mr Gilbert’s theses will be borne out, but I think they should be included since they present a risk to several companies held in ARK’s funds, including ARKK and ARKQ. Conclusion ARK has had a difficult few years as a research firm and fund manager, as its funds have largely underperformed the S&P 500 and disappointed investors hoping to see its capital grow. However, I believe that the guiding principle of ARK’s funds – that innovative technology and the companies that produce it will deliver outsized rewards over time – will be proven correct, and will guide ARK to growth once again. I believe investors with the patience to wait, and the stomach to hold onto ARKK shares during the ensuing volatility, will be rewarded over the next few years, barring significant adverse market developments and significant management missteps. I also believe that ARKQ is a safer bet for risk-tolerant investors who want to ride the disruptive wave of automation and robotics advancements that the companies in ARKQ will bring about.  I therefore rate shares of ARKK a speculative buy, and I rate shares of ARKQ a buy.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2486719262"}