With an impressive ~86% gain year-to-date, the ARK Fintech Innovation ETF (NYSEARCA:ARKF) is catching the eyes of investors. While the fund deserves credit for its strong 2023 performance, caution is likely warranted going forward due to its lack of diversification, disappointing performance over the long run, and high expense ratio. Furthermore, investors should note that analysts have a fairly underwhelming price target for ARKF. I am neutral on the ETF.
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What is the ARKF ETF’s Strategy?
ARKF is one of several popular ETFs from Cathie Wood’s firm ARK Invest. Like its ARK counterparts, the fund is actively managed and focused on disruptive technology companies. In this case, ARKF is focused specifically on fintech stocks.
ARK Invest defines these as companies involved in “mobile payments, digital wallets, peer-to-peer lending, blockchain technology, and financial risk transformation.” Think companies like Coinbase Global (NASDAQ:COIN), Shopify (NYSE:SHOP) and Block (NYSE:SQ), which are three of ARKF’s top holdings.
ARKF’s Holdings
ARKF owns 30 stocks, and its top 10 holdings make up nearly two-thirds of the fund’s assets. You’ll find an overview of ARKF’s top 10 holdings from TipRanks’ ETF holdings tool below.
As you can see, this is not a very diversified fund, and it gives investors a lot of exposure to its top holdings. Coinbase, in particular, has a large weighting of 13.2%.
Coinbase has had a banner year, posting a 340% gain year-to-date, which has helped drive ARKF higher.
But Coinbase typically trades in line with the ebbs and flows of the crypto market and the price of Bitcoin (BTC-USD) in particular, which can be volatile. When the price of Bitcoin goes down, COIN stock’s price often declines significantly. This leaves ARKF holders with exposure to plenty of potential volatility.
Just as this large position in Coinbase has benefited ARKF this year, this heavy level of concentration also has the potential to hamper ARKF if it sells off. For this reason, it’s worth noting that the average price target for Coinbase stock implies downside potential of 37.2% from its current price.
In addition to this large Coinbase stake, ARKF also has a large position in Block. Block also often trades in tandem with Bitcoin, so, again, ARKF gives investors quite a bit of exposure to the potential volatility of the crypto market.
Other prominent holdings include e-commerce players like Shopify and Global-E (NASDAQ:GLBE), online gambling and daily fantasy sports provider DraftKings (NASDAQ:DKNG), and online brokerage Robinhood Markets (NASDAQ:HOOD).
Underwhelming Long-Term Performance
ARKF is up big this year, but this is a departure from its performance in recent years. For example, the fund lost 65.1% in 2022 and 17.8% in 2021. To ARKF’s credit, it returned 108% in 2020, but as you can see, its performance has been volatile and inconsistent from year to year.
As of November 30th, ARKF has annualized losses of 20.3% over the past three years, which is a fairly disappointing performance, especially since the broader market performed well during this time frame.
For example, the Vanguard S&P 500 ETF (NYSEARCA:VOO), which simply invests in the S&P 500 (SPX), returned 9.7% on an annualized basis over this same time frame.
Tech-oriented ETFs, like the Technology Select Sector SPDR Fund (NYSEARCA:XLK) and the Invesco QQQ Trust (NASDAQ:QQQ), which would be even more appropriate peers for ARKF, outperformed it by an even larger margin. As of November 30th, XLK has an annualized three-year return of 15.4%, while QQQ has an annualized three-year return of 9.7%.
It’s hard to make the case for investing in ARKF when it has underperformed both the broader market and these tech-focused funds over the past three years.
High Expense Ratio
Another negative aspect of ARKF is that it is an expensive fund. An expense ratio of 0.75% means that investors putting $10,000 into the fund will pay $75 in fees over the next year.
These fees can really add up over time. For example, if the fund returns 5% per year going forward and maintains this 0.75% expense ratio, these same investors would pay $240 in fees over three years.
Looking further out, assuming the same parameters, these investors would pay $417 in fees over five years and a steep $931 in fees over a decade. Meanwhile, XLK and QQQ, the tech-focused ETFs mentioned above, feature expense ratios of just 0.10% and 0.20%, respectively, making them bargains compared to ARKF.
Investors putting $10,000 into XLK would pay just $10 in fees in year one. Using the same parameters discussed above, these investors would pay just $32 in fees over three years, $56 in fees over five years, and $128 in fees over 10 years.
Meanwhile, investors putting the same amount into QQQ would pay $20 in year one, $64 over three years, $113 over five years, and $255 over 10 years. Below, you can check out a comparison of ARKF and these two larger ETFs using TipRanks’ ETF Comparison Tool, which allows investors to compare and contrast up to 20 ETFs at a time based on a wide variety of customizable inputs.
ARKF is an actively managed ETF, so it’s unsurprising that it is more expensive than these index funds, but given the fact that it has underperformed them over the past three years, it’s difficult to justify paying this premium for ARKF.
Is ARKF Stock a Buy, According to Analysts?
Turning to Wall Street, ARKF earns a Moderate Buy consensus rating based on 21 Buys, nine Holds, and zero Sell ratings assigned in the past three months. The average ARKF stock price target of $25.35 implies 3.7% downside potential.
Alternatives Abound
ARKF has had a monster year, and Cathie Wood and ARK Invest deserve credit for the major comeback the fund has staged this year. However, I’m not enthusiastic about ARKF’s future performance, given its lack of diversification, its less exciting long-term track record, and the high fees it charges.
While not directly analogous, other tech-centric ETFs like XLK and QQQ have provided better returns for a cheaper price over a three-year time frame, so investors would be wise to consider these investment opportunities before looking to ARKF.
