We take a look at two ETFs that provide an alternative to one another, but should investors be long or short disruptive innovation?
Feb. 3, 2022
Over the last few years, growth stocks have had stellar returns, with people rushing to buy businesses involved in industries such as electric vehicles, genomics, fintech, and more. While many such as Cathie Wood, believe in growth investing and the future potential in these industries, others believe that valuations have gotten lofty. After a turbulent start to 2022, should investors buy the ARK Innovation ETF (NYSEARCA: ARKK) or the Tuttle Capital Short Innovation ETF (NASDAQ: SARK)?
ARK Innovation ETF
The ARK Innovation ETF is ARK Invests flagship fund led by famed investor Cathie Wood. The fund revolves around companies making technologically enabled products and services that potentially change how the world works, and it calls this "disruptive innovation".
The fund invests with a five-year time horizon and provides diversification across disruptive industries. It currently comprises 43 stocks, with Tesla the largest holding with a weighting of roughly 8%, followed by Teladoc, Zoom, Roku, and Coinbase.
Despite the recent downturn, the ETF has returned an impressive 236% over the last five years, more than double that of the S&P 500. An investment in ARK Innovation will require patience but can potentially produce outsized returns over the long term.
Many of its largest holdings are trading at high valuations and are unprofitable. Declines in larger holdings due to inflation fears, high-interest rates, and high valuations have weighed on the ETF's performance and may continue to do so for some time.
Tuttle Capital Short Innovation ETF:
The Tuttle Capital Short Innovation ETF, SARK hereafter, was launched in November 2021. The ETF aims to achieve the inverse (-1X) of the return of the ARK Innovation ETF on a single day.
The SARK ETF provides an alternative for investors who believe that high growth stocks valuations have risen too high and that the bull thesis for these disruptive industries such as fintech and genomics, among others, seems stretched. Since inception, this has paid off with a 23% return versus a negative return for many major indices and the ARK Innovation ETF over the same time period.
Tuttle Capital CEO Matthew Tuttle stated that it focused on ARKK due to its holdings in "unprofitable, high-multiple technology". This ETF may be a useful tool to hedge against declines in growth stocks and major indices, particularly in volatile times such as 2022, where the tech-heavy Nasdaq and S&P 500 have both entered correction territory.
The SARK ETF has an expense ratio of 0.75% due to it being an actively managed fund, but this also eats into returns.
It also has a limited operating history, and although it has been successful since its inception, this does not mean it will continue to do so. Inverse ETFs are typically only held for one day and can lead to losses quickly if, in this case, the Ark Innovation ETF rises.
So, which ETF is a better buy today?
Although the Tuttle Capital Short Innovation ETF can be used as a tool to provide short exposure, Cathie Wood's ARK Innovation ETF appears to remain an excellent long-term investment for those with a high-risk appetite.
