How to Keep Clients on the Right Disruptive Growth Track

Growth stocks are taking a back seat to cyclical value fare this year and it's possible that bullishness has plenty room left to run. That doesn't mean the case for growth is dying. It's not even on life support.

Growth is simply trailing value this year and given the long-running persistence of growth stocks (it topped value for over a decade until late 2020) and clients' affinity for innovative growth strategies, it's fair to say plenty of advisors are fielding growth-related queries this year. Clients may be asking when growth is going to rebound in earnest or if the factor's recent lethargy is an opportunity to embrace disruptive growth strategies, such as the beloved ARK Innovation ETF (NYSEARCA:ARRK).

A few things to know about ARKK. It was one of 2020's story exchange traded funds, gathering assets at a rapid pace while delivering stellar returns. Then along came the now well-documented spike in 10-year Treasury yields, which punished growth strategies while stoking the move to value stocks.

Nearly halfway through 2021 and ARKK resides 25.55% below its all-time highs. However, there are signs disruptive growth is awakening from its 2021 slumber. Treasury yields are steadying and ARKK is higher by 15.47% for the month ending June 18.

ARKK Still Matters

A few months of laggard status doesn't ruin the case for any fund, particularly one that operates on the long-term time horizons that ARKK does. In fact, the growth-to-value rotation is likely extending the current bull market, which is of course a plus for ARKK and other growth strategies.

Obviously, one of month of positive price action doesn't mean disruptive growth is all the way back, but this is an investment style many clients, particularly those in younger demographics, just can't quit. Where advisors can add value is by discussing the appropriateness of an ARKK in the client portfolios and right-sizing those allocations.

“Investing in this space exposes investors to a high degree of risk and potentially elevated volatility, but also offers the potential to generate far higher-than-average returns. As such, it has a place in investor portfolios but only as an allocation in an already well-diversified portfolio,” according to Morningstar.

Advisors don't necessarily need to pitch ARKK – there are other basket approaches offering disruptive growth exposure, but another value add proposition is steering clients away from fawning for individual stocks in this segment because stock picking here is exceptionally difficult. Whether it's with an active or passive fund, client outcomes can be potentially be enhanced by leaving stock picking aside when it comes to innovative growth fare.

“For investors who don't have the inclination to spend the time and effort to analyze and invest in individual stocks, it is most appropriate to gain exposure through an exchange-traded fund or mutual fund,” adds Morningstar. “For investors who are willing to spend the time to conduct their own individual stock analysis, we recommend owning a small portfolio of these stocks in order to benefit from diversification.”

ARKK Advantages

Aside from being actively managed, which is a massive point in its favor, ARKK is representative of the depth of what encompasses disruptive growth investing. The features exposure to multiple themes, taking some of the edge off single theme risk.

“Because disruptive technology is such a broad, wide-reaching concept, it is difficult to conduct a screen to specifically identify companies that fall within the group,” notes Morningstar.

Add up ARK Invest commitment to long-term investing and ability to nimbly navigate what is and what no long is disruptive growth and clients have an effective to tool to stick with innovation without having to do the legwork themselves.

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