17.06.2024 Issuer Call Redemption Notice

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Sandeep Rao


Active ETFs This Year: Pursue Value or Growth?

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Earlier this month, Ark Investment Management principal Cathie Wood asserted that the fund manager’s ARK Innovation ETF (ARKK) would see a 50% compound annual rate of return over the next five years. This assertion came shortly after Morningstar deemed ARKK the worst-performing US equity fund of Q1 2022 among all the funds in its coverage and a downgrade in its rating on account of its vulnerability for more losses. 

ARK Funds’ value proposition comes from two distinct features:

  1. The fund manager’s vision on the technology landscape that might drive their chosen stocks’ performance

  2. The “actively-managed ETF” structure.

The second aspect is a very interesting feature in a crowded universe of ETFs. Most ETFs are “passive” instruments that track an index, which are bound by publicly-available rule-driven methodologies that adhere to a timetable for “rebalancing” the weights of their constituents (typically once every quarter) and the “reconstitution” of the entire portfolio itself (typically once a year). However, the fund managers for “actively-managed” ETFs have more flexibility in making changes to strategy and the securities they hold – provided they disclose portfolio holdings regularly. 

There are quite a few other ETFs with varying degrees of overlap in the coverage given by Ark Funds that are also “actively managed”. A side-by-side comparison alongside these funds would be beneficial. 

The two points mean that analysis can be done along two distinct axes. The first axis would be the realm of “technological innovation”. Here, we compare ARKK, the ARK Genomic Revolution ETF (ARKG) and the ARK Next Generation Internet ETF (ARKW) alongside:

  • The BlackRock Future Tech ETF (BTEK), an actively-managed ETF which provides diversified exposure to innovative companies that can shape the global economic future.

  • The Innovator Loup Frontier Tech ETF (LOUP), an ETF that tracks an index. The index begins equal weighted, but is adjusted with a conviction weighting that “overweights” the companies growing and projected to grow revenue, EPS, and cash flow the fastest. This index rebalances monthly and includes (but isn’t limited to) companies engaged in the development and utilization of artificial intelligence, robotics, autonomous vehicle technologies, virtual reality, mixed/augmented reality and other similarly disruptive technological innovations. 

The second axis would be the “actively-managed ETF” structure. Given that ARK Funds promise growth, lets compare and contrast with the opposite, i.e. ETFs comprised of “value” stocks. Since ARKK has a large number of companies that are present in ARKG and ARKW, we’ll compare ARKK alongside:

  • The Avantis U.S. Small Cap Value ETF (AVUV), which invests in a a broad set of U.S. small-cap companies with low valuations and higher profitability ratios.

  • The Vanguard U.S. Value Factor ETF (VFVA), which uses a rules-based quantitative model to evaluate and invests in stocks with lower market valuations relative to fundamentals.

Historical Ratio Analysis

Just as with the ETF comparison in recent articles, proximate ratios are calculated in the constituent average as well as weighted average (driven by ETF constituent weight) formats over a series of one-year windows – with two additional windows to show the most recent states – in order to evaluate the ETFs.

Now, data services tend to not report ratios that are too high or too low. Given that the U.S. equity market is the most overvalued in the world, the former is more likely than the latter. With regard to PE Ratios, the proportion of tickers with unreported ratios relative to the total number of tickers will be computed. Since “active ETF” fund managers have enormous flexibility in altering the weights and fund composition, there will be no weight consideration in this metric.

The “Technology” Axis

Trends in ratio performance along the “technology” axis among these ETFs yield some interesting insights:

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
  • ARKK’s high valuations in Price to Sales (PS) Ratio in mid-2021 as well as its high reported valuations in Price to Earnings (PE) Ratio in mid-2020 are now at three-year lows but the percentage of unreported PE valuations remain consistent. ARKG shows a roughly similar trend while ARKW shows the opposite, along with a 3-year increase in unreported PE valuations.

  • BTEK shows a cool-off in both PS and PE calculations since its launch in September 2020. However, it’s Price to Book (PB) calculation show a recent uptick. The ratio of unreported PE valuations remain fairly consistent at the halfway mark.

  • LOUP, on the other hand, has unreported PE valuations lower from a year ago, with all three ratios also lower.

The “Fund Structure” Axis

Trends in ratio performance along the “growth versus value” argument that is represented by the selected ETFs deliver a rather unsurprising result:

Both “value” ETFs have far greater (and nearly consistent) ratio efficiency in practically every window and have substantially better unreported PE metrics than ARKK. 

AUM vs Price Comparison

To gauge investor preferences, lets first establish the May 2019 window as the “zero” line. Each subsequent date’s comparison will denote the change in Assets Under Management (AUM) and price as of that date relative to the same values in the prior date. 

Along the “Technology” axis, there is a definite downturn in AUM seen in all the specified ETFs:

In the changes (“deltas”) derived from the most recent data, it can be seen that the decrease in ARKK’s AUM is less than that seen in the ETF’s price – which is a change from January’s “deltas”. Thus, Miss Wood is indeed correct in that regard: there have been some inflow into the fund manager’s flagship. However, it’s clearly evident that ARKG and ARKW continue to face fund outflow.

On the other hand, along the “fund structure” axis, both “value” ETFs show an uptick in AUM despite price downturns in more recent times.

In Conclusion

Given the fact that niche “technological innovation” stocks have often enjoyed extremely high investor interest in the past, it is arguably natural that this outlook comes crashing down in times of uncertainty such as the present. With recessionary pressures increasing, there will be a palpable “flight of capital” towards value stocks that provide exposure to established lines of business in the economy.

This poses a quandary to “active ETF” managers such as Ark. While they do have the flexibility to pivot, a comprehensive change in holdings towards more ratio-efficient stocks will bring into question their stated vision for the future and the benefits their vision can deliver to investors. In times such as these, funds (and stocks) promising “technological innovation” that will be adopted en masse in some unspecified time in the future are bound to continue their downturn until a “floor” becomes apparent.

Until then, pragmatic investors can potentially find some benefit in betting on Ark’s downside. Another interesting strategy would be for investors to buy into the “growth story” at a reasonable price after the “floor” is reached and wait for liftoff. Of course, whether this liftoff happens sometime later this year, next year or even three years cannot be predicted in good faith.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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