hi i'm jimmy in this video we're going to look at one of ark invest's largest etfs known as the
Ark Innovation ETF ticker symbol ARKK our goal with this video is to get to better understand
what the ark innovation ETF does and to see if we can identify some of the strengths and weaknesses
of this ETF okay so let's jump right in so the ark innovation ETF sets out to invest in companies
that they call disruptive innovation companies things like robotics artificial intelligence dna
sequencing blockchain the list goes on and on now typically this ETF invests in somewhere between 35
and 55 companies at a time within the ETF they got launched the etf itself was launched in october
of 2014 and it's managed by cathie wood and her team now just so we're all on the same page etf
is short for exchange traded fund so basically if we bought this etf well this would mean that we
bought a pre-built portfolio of stocks and in this case those stocks are fast growth
companies that are trying to change the world so if we're not sure what company we should invest in
well it might make sense to invest in the entire group of companies that in theory are doing this
this is the group of companies that ark invest has hand-picked that belong in this portfolio
now this etf is actually an actively managed etf which is a bit unique most etfs track an index
and that index is built by a set of rules with the ark innovation etf well cathie wood and her team
actually select the companies that go into it and how much of each company belong into
the portfolio now with that being said these are the holdings that are in the ark innovation etf
based on how their portfolio weight bit which is basically how much of the portfolio each stock
represents the more the company represents the higher their weight well the more important that
that company's performance to the etf really is we can see that tesla here represents about 11
of the ark innovation etf now i should point out that these weights can actually change
fairly quickly now let's imagine that none of the stocks they all stayed about the same one day
and in this case tesla which represents about 11 of the portfolio skyrocketed up in price well if
that went up in price the weight the importance to this etf would increase same is true vice versa if
tesla collapsed well the weight would decrease so with that being said well we can see the types of
companies that the ark innovation etf ultimately invests in they're fast growing companies that
have performed frankly fairly well in recent years so much of the past year has been great
for this etf in fact this is what the chart looks like for the ark innovation etf and clearly this
was a very impressive run over this past year the return the ark innovation etf is up about 160
and yes granted that is coming off of pretty close to the bottom of last year last year the
stock market pulled back so one year from today coincidentally is coming off of about the bottom
of last year but still this 160 if we were to compare that to something like the s p 500 well
the s&p 500 was up about 50 so this is up this etf is up more than triple what the s p 500 is
which again is fairly impressive and i should also point out that during this time period while the
ark innovation etf has actually paid a dividend in december they they've done that for the past few
years to pay a dividend in december so this most recent december they paid about two dollars or so
in dividends so that actually adds to the total return of the portfolio so the actual
return of the past year would be like 163 now just to really understand what is driving this very
impressive performance there's something that we can look at known as the contribution to return or
basically what is the impact that each holding has had on the performance on the total performance
of that particular fund now just to show you what i mean real quick let's look at a stock a
single stock like zoom well we can see that zoom represents a bit over three percent of the total
portfolio and if the ark etf had owned zoom for the entire year well zoom during this time period
coincidentally was also up about 160 percent so we would simply take that 160 percent and multiply it
by the weight so in this case about 3 percent and with that rather simple math tells us that
this one holding would add about 5 percent of total return to the portfolio but in this case
well ark actually they added a bunch of zoom very recently it was just a month or two ago and during
that time well zoom is actually down a bit and this means that zoom actually owning zoom has
actually dragged down their performance by about 1.1 percent since they've held it and actually
used this one as an as an example because there were very few stocks that they had that hurt their
performance most of their stocks did well and this is the impact that each of their holdings over the
past year have had on the total return of the tf and if we snap back to the top of this real quick
well we can see that their top five performing stocks by contribution how much they added to
the total return well they actually made up the majority of the returns for the ark innovation etf
over the past year together these top five stocks have added about 96 percent to the total return
of the entire fund so nearly two-thirds of the funds performance are because they owned
this these particular stocks now i'm not saying this as a criticism believe it or not this is
usually how investing goes i'm sure many of us have seen this with our own personal portfolios
we might buy let's say 20 or 30 different stocks maybe even 50 stocks and out of that maybe just
a small handful maybe two maybe five maybe six or seven are driving the performance either up
or down and that can have a big impact but that is usually the way it goes the reason this is one of
the benefits of diversification you diversify as much as you can because who's to say that these
top five stocks right now don't have a great run over the next year but maybe the next five have
a really phenomenal run now of course the flip side to this is that if some of the larger stocks
not some of the stocks with a bigger position more weight well if those stocks underperform the stock
market or go negative or have a bad year well it's very possible that those highly weighted stocks
drag down the performance and ultimately the etf might not do as well over the next year or so so
perhaps we think that hyperinflation might come maybe even out of hyperinflation maybe if we think
hype inflation in general is going to go really high a lot of these stocks would not do well in
that scenario and if that's the case if that's what we believe then we might want to stay away
from this etf if we think that these stocks of these types of stocks are going to be instrumental
so they'll continue to move higher well maybe it makes sense to get involved with the portfolio
and this actually brings us to some key features of the ark innovation etf so this etf has an
expense ratio of about 75 basis points so that's three quarters of one percent on an annual basis
and they have almost 18 billion dollars in assets so looking at just these two facts alone well
the assets under management well that's that's how much money they have in the fund how much
they have to invest and that's actually a decent amount of assets to have and that could ultimately
affect their performance so here's what i mean by that let's pretend that there's a small company
small company market cap a couple hundred million dollars that could be a very good position for
them to have well in order for that position to have a decent amount of weight in the portfolio
and ultimately that stock went really hard to really have an impact on the fund
well they would have to take a very large position for it to be a meaningful piece of their portfolio
because they have so much assets under management a lot of times more assets can be somewhat it can
be a drag on performance now luckily there are plenty of large companies out there
that are innovating enough that it might qualify for cathie wood to add them to this portfolio in
general so i think that they'll probably stay away from from some of the super small companies let's
stick with the larger ones luckily there's plenty of them now the fee the fee of 75 basis points is
a bit on the higher side but as i've said in the past in some other videos i've done on etf fees
i think that it is okay to pay higher fees if that particular fund or etf in this case
is serving a very specific purpose and i think this fund qualifies as that and given how well
the ark innovation etf has performed especially over the past year while i'm sure that many of us
are willing to pay a very what turns out to be a modest fee relative to the total performance
but that performance may not hold up so i think that right now i'm okay with the fee
i actually actually i'm fine with the fee in general i think that again this is an acceptable
fee for a very specialty type of fund and i think that this one does it so i'm not i have no problem
with that higher fee plus i haven't found too many funds and too many etfs that do exactly
what cathie wood is trying to do and if that's the case if this is the one access point well fine a
higher fee that's okay now if you happen to know of any funds or any etfs that compete with this
directly compete with the types of companies they invest in please let me know in the comments below
okay now this brings us to the question does it make sense to invest in this etf at this point and
here's my issue with it given how far up it has been given the hurdles that the etf will it is
very unlikely that they repeat the performance from last year for any extended period of time
but i do think it makes sense i think it offers solid exposure to this type these
types of companies i think having an etf like this as a piece of our portfolio to complement to give
us access to some growth stocks growth stocks can be tricky to pick out so if we didn't want
to pick out individual growth stocks we wanted this portfolio to represent the growth component
of our portfolio i think that makes tons of sense i think that it could be a smart move
but i think it really makes more sense if that is a very long-term holding and we can
deal with the inevitable inevitable volatility that this portfolio will bring now for me on a
personal basis well i i prefer picking more value stocks than growth stocks
if i was looking again for the access to this these types of companies this might be a good
way of doing it but because i prefer picking individual companies the way i'll use this
etf is what i'll probably be doing is watching this etf to see what stocks they add or which
ones they sell off and perhaps if we can find one that they add maybe that's a good company
to research quickly and see if it makes sense to invest in it so for me i'll be avoiding this
etf in the meantime if there was ever a pullback in these types of companies and this etf looked
value like a more of a value play i'm in but in the meantime i think it makes more sense for me
to stay up and again that's probably because i again prefer value stocks or dividend stocks and
although i'm building my portfolio now and i'm not reinvesting the dividends that i receive into
the same stocks i'm actually reinvesting those in other hopefully value stocks that i can find and
i think that that's a more logical way for me to personally build my portfolio now if you're
curious why i'm not using dividend reinvestment plans to reinvest back into the same stock well
i actually did a video where i go through some of the pros and cons of dividend reinvestment plans
so if you're curious perhaps that's a good next video for you to watch i've got a link right
here i've got a link in the description below and thank you so much for sticking with me all the way
to the end of the video i really appreciate it thank you and i'll see in the next video