In theory, the widely observed Nasdaq-100 Index (NDX) makes for a useful barometer for the ARK Innovation ETF (NYSEARCA:ARKK).
After all, the ARK exchange traded fund focuses on disruptive growth stocks and NDX has long had an advantage in the innovative holdings department, explaining its long-running advantage – that is in bull markets – over other broad market benchmarks.
With growth stocks of all stripes, including both ARKK and NDX member firms, being taken to the woodshed this year, some clients may be apt to think the ETF and the index are joined at the hip. That’s actually not the case.
In fact, ARKK has very little in common with the basic cap-weighted ETFs tracking the Nasdaq-100. Those products have just two overlapping holdings and just 5.9% of ARKK’s components are also NDX member firms, according to the ETF Research Center (ETFRC). The overlap by weight is a scant 4%. In other words, ARKK and NDX aren’t even distant relatives, indicating comparisons to that effect are inaccurate.
What Cathie Says
One of the comparisons that’s popping up today is that disruptive growth investing is enduring its “2000” phase, meaning a fund like ARKK is supposedly acting like NDX amid the bursting of the tech bubble in 2000. That’s another comparison that may lack merit.
“In a comparison of the revenue, profitability, and long-term valuation of their underlying companies, the Nasdaq circa 2000 and ARKK today bear little resemblance to one another. Interestingly, obfuscating the number of bankruptcies and forced mergers associated with companies that never should have gone public,” says ARK CIO and founder Cathie Wood in a recent report. “Acting on euphoria, not fundamental analysis, investors valued companies based on the number of ‘eyeballs’ they ultimately might be able to attract, nothing more. Without 2001-2003 data for the broader index, to compare the Nasdaq of 1998-2005 to we defaulted to the Nasdaq 100, which presumably has benefited from ‘survivor bias’ — stronger revenue growth, higher profitability, and larger capitalizations — relative to the all-cap Nasdaq Composite.”
Obviously, Wood has a vested interest in defending her firm’s flagship ETF. Naysayers are sure to highlight as much, but that doesn’t mean the above quote is false. Actually, she’s onto something. No, ARKK’s roster isn’t perfect, but it is more attractive than the Nasdaq 100 was in 2000.
That’s not to say every current ARKK holding will eventually be a story stock, but today, the ETF probably isn’t home to the next eToys or JDSUniphase.
More Supporting Data
Beyond the above points, ARKK components are growing sales at a vastly superior clip to Nasdaq-100 companies in 2000.
“Last year, companies in ARKK increased revenues at more than a 60% rate, roughly twice the rate of those in the Nasdaq 100 as the bubble burst in 2000,” adds Wood. “Among the reasons for the outsized growth were the innovative solutions they provided during the coronavirus crisis: genomic sequencing of the coronavirus, molecular diagnostic testing, synthetic biology, and vaccines; the digitalization of work, play, entertainment, shopping, and payments; automation.”
Add to that, ARKK member firms are forecast to increase revenue at average rates of 25% to 27% over the next three years. That’s a far better outlook to what the Nasdaq offered investors two decades ago.