A new actively managed growth ETF called the CastleArk Large Growth ETF (NYSEARCA:CARK) just launched in December. This new ETF looks promising based on its strong, concentrated portfolio of holdings, which feature Outperform-rated TipRanks Smart Scores, implying that the ETF can beat the market. Based on these factors, I’m bullish on CARK.
What is the CARK ETF’s Strategy?
CARK was launched by CastleArk in December and has accrued $324.8 million in assets under management (AUM) so far. CastleArk is new to the ETF world but has extensive experience in separately managed accounts and collective trusts. Its large-cap growth strategy for these vehicles, called CastleArk U.S. Large Cap Growth, has delivered an annualized 14.2% return, net of fees, over the past decade.
CARK is an actively-managed ETF in the same vein as this large-cap growth strategy. CARK seeks “long-term capital appreciation through a concentrated growth portfolio of predominantly U.S companies having market capitalizations greater than $4 billion at time of purchase.”
After starting with an initial investment universe of 1,000 stocks, the portfolio management team seeks to create a highly concentrated portfolio of 20-30 stocks. CastleArk says, “The investment team seeks to invest in businesses possessing a superior franchise, potentially making them more immune to disruption and possibly allowing them to generate sustainable growth, high profitability, and abundant free cash flow.”
While many growth funds look to invest in “disruptors,” CARK’s portfolio managers favor large and established firms and believe that the market often overestimates the potential of new, early-stage incumbents to disrupt these established leaders.
The key drivers that CARK is looking for in the businesses it invests in are profitability, industry structure, and free cash flow generation. It believes that these factors play a bigger role than revenue growth in driving medium- to long-term performance. CARK also prizes firms with leading market positions that possess characteristics including robust brand loyalty, proprietary technology and patents, high switching costs, logistical advantages, substantial capital requirements, economies of scale, network effects, and more.
Essentially, CARK isn’t going to invest in every hot growth stock that comes along that may be a flash in the pan, but it will invest heavily in established market leaders that demonstrate sustainable, profitable growth over the long term, such as Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA), which we’ll delve into further in the portfolio section.
Portfolio Management Team
The portfolio is managed by an experienced team of three investment managers. This includes Jerome Castellini, the co-founder and co-CIO of CastleArk, who has over 40 years of investment experience and has been with the firm since 1999; CastleArk co-CIO Dan Becker, CFA, who has over 30 years of investment experience; and Quentin Ostrowski, CFA, who has over 35 years of investment experience and more than 20 years at CastleArk.
A Portfolio of Top Notch Smart Score Stocks
CARK holds just 25 stocks, and its top 10 holdings account for nearly two-thirds of the fund, so this is not a very diversified ETF. However, in fairness to CARK, diversification is not really the point of the fund, as it is a concentrated, actively-managed bet on large growth leaders. Below is an overview of CARK’s top 10 holdings using TipRanks’ holdings tool. One thing you’ll immediately note about CARK’s holdings is that they collectively feature fantastic Smart Scores across the board.
The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. The score is data-driven and does not involve any human intervention.
Six of the eight market factors that are incorporated into the Smart Score calculation are unique to TipRanks. The factors include Wall Street analyst ratings, corporate insider transactions, financial blogger opinions, individual investor sentiment, news sentiment, hedge fund manager activity, technicals, and fundamentals. A score of 8 or above is equivalent to an Outperform rating.
Remarkably, all 10 of CARK’s top 10 holdings feature Outperform-equivalent Smart Scores of 8 or higher. Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), Dexcom (NASDAQ:DXCM), and Eli Lilly (NYSE:LLY) all feature ‘Perfect 10’ Smart Scores, while Microsoft, Nvidia, Amazon (NASDAQ:AMZN), and Mastercard (NYSE:MA) all feature Smart Scores of 9.
While none of these mega-cap growth names are exactly what one would call diamonds in the rough, CARK features some interesting, less ubiquitous names (as far as large-cap stocks go) outside of its top 10 holdings.
These include stocks such as Lam Research (NASDAQ:LRCX), ASML Holding N.V. (NASDAQ:ASML), and Applied Materials (NASDAQ:AMAT), all of which have strong moats as makers of semiconductor manufacturing equipment, and all of which boast Outperform Smart Scores as well. Lam Research and ASML both enjoy 10 out of 10 Smart Scores, while Applied Materials scores an 8.
Other strong holdings include medical device makers Stryker Corp. (NYSE:SYK) and Intuitive Surgical (NASDAQ:ISRG), which feature Smart Scores of 9 and 10, respectively.
CARK itself features a venerable ETF Smart Score of 9. This puts CARK in rare company as one of just 14 ETFs out of the 3,300+ in TipRanks’ ETF database with an ETF Smart Score of 9 or better.
Is CARK Stock a Buy, According to Analysts?
Turning to Wall Street, CARK earns a Moderate Buy consensus rating based on 25 Buys, one Holds, and zero Sell ratings assigned in the past three months. The average CARK stock price target of $33.30 implies 9.7% upside potential.
What Is CARK’s Expense Ratio?
CARK has an expense ratio of 0.54%. While this isn’t great, it isn’t out of line with other actively managed ETFs, and many are more expensive than CARK. This expense ratio means an investor will pay $54 in fees annually on a $10,000 investment in CARK. Assuming the fund maintains this expense ratio moving forward and returns 5% per year going forward, an individual investing $10,000 into the fund would pay $173 in fees over a three-year time frame.
Investor Takeaway
CARK is new, so it hasn’t established a track record of performance yet, which will be important to watch over time. However, it looks promising, and I’m bullish on the concentrated ETF based on its strong portfolio of holdings, which all feature top-notch Smart Scores.
