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ARKK Vs. QQQ: Which ETF Is The Better Pick For Long-Term Investors?

Dec 9, 2021

Robert Castellano profile picture

Semiconductors, Solar, Expert Witness

Contributor Since 2006

Dr. Robert N. Castellano, is president of The Information Network www.theinformationnet.com. Most of the data, as well as tables and charts I use in my articles, come from my market research reports. If you need additional information about any article, please go to my website.

I will soon be initiating an investor newsletter. Information to register will be online on my website.

I received a Ph.D. degree in chemistry from Oxford University (England) under Dr. John Goodenough, inventor of the lithium ion battery and 2019 Nobel Prize winner in Chemistry. I've had ten years experience in the field of wafer fabrication at ATT Bell Laboratories and Stanford University.

I have been Editor-in-Chief of the peer-reviewed Journal of Active and Passive Electronic Devices since 2000. I authored the book "Technology Trends in VLSI Manufacturing" (Gordon and Breach), "Solar Panel Processing" (Old City Publishing), "Alternative Energy Technology" (Old City Publishing). Also in the solar area, I am CEO of SolarPA, which uses a proprietary nanomaterial to coat solar cells, increasing the efficiency by up to 10%. I recently published a fictional novel Blessed, available on Amazon and other sites.

Summary

  • In the past year, ARK Innovation ETF (ARKK) has retreated from 152% growth in 2020 to -14% in 2021.
  • Invesco QQQ ETF (QQQ) is up 29% in the past year.
  • In the past 10 years, QQQ grew 304% while ARKK, with significant volatility, grew 406%.
  • Stocks in the ARKK ETF can be considered Covid stocks, benefiting from the lockdowns, which may not be relevant post-lockdowns.
  • This idea was discussed in more depth with members of my private investing community, Semiconductor Deep Dive. Learn More »
Silhouette of Noahs Ark with animals at sunset

JoeLena/E+ via Getty Images

Introduction

ARK Innovation ETF (ARKK), posted a 152% annual return in 2020. Just as investors flocked to ARKK based on growth and the reputation of fund manager Cathie Wood, they began to desert ARK Innovation amid its -25% YTD underperformance. The ETF dropped 5.5% on Friday, Dec. 3 amid fears of inflation and the Omicron variant of Covid, despite their 2020 growth due to Covid.

Shown in Chart 1 is how ARK Invest's six actively managed ETFs fared against each other over a 1-year performance chart. ARKK is not alone with negative growth for the 1-year period as five of six ARK Innovation ETFs are negative and only ARKQ is positive at 11.09% growth.

Perhaps the editors of Seeking Alpha will ask me to write about all these ETFs like they did this one on ARKK. This reversal of fortune for ARK and ARKK warrants a deep dive into these ETFs based on an ARK Invest investment strategy of buying disruptive innovation stocks.

Chart 1

Invesco QQQ ETF (QQQ) showcases underlying holdings from multiple sectors and industries as shown in Chart 2.

Chart 2

Information Technology is the largest. Companies in this sector are involved in the research, development and distribution of technologically focused products and services. This includes the creation of hardware like computers and smartphones, the components that make them tick and the software they run on.

  • Apple Inc. (AAPL)
  • Microsoft Corp. (MSFT)
  • Nvidia Corp. (NVDA)
  • PayPal Holdings (PYPL)
  • Adobe (ADBE)

Communication Services was established in 2018, this new sector covers the telecommunications, entertainment and network services industries. These companies are changing the way we find information, consume content and connect to each other.

  • Alphabet (Class C) (GOOG)
  • Facebook (Class A) (FB)
  • Alphabet (Class A) (GOOGL)

Consumer Discretionary includes companies providing the non-essential goods and services that people enjoy when they have income to spare. Invesco QQQ features some of the most prominent and boundary-pushing companies in the sector, across categories like clothing, entertainment, automobiles, hotels, restaurants and more. It also includes some of the biggest online retail companies.

  • Amazon (AMZN)
  • Tesla (TSLA)

Comparing ARKK and QQQ

One way to simplify investment is through an exchange-traded fund (ETF). Exchange-traded funds ("ETFs") combine aspects of mutual funds and conventional stocks. Like a mutual fund, an ETF is a pooled investment fund that offers an investor an interest in a professionally managed, diversified portfolio of investments. But unlike mutual funds, ETF shares trade like stocks on stock exchanges and can be bought or sold throughout the trading day at fluctuating prices.

A comprehensive analysis of these two ETFs is shown in Table 1. One of the key differentiators is Assets Under Management ("AUM"), which represents the total of all investor dollars invested in all share classes of the fund. Investors generally consider higher investment inflows and higher AUM comparisons as a positive indicator of quality and management experience. That would make the QQQ ETF a strong choice with an AUM of $210.55 billion compared to just $17.46 billion for ARKK.

In a comparison of stock performance, Chart 3 shows the 1-year stock prices for the ARKK and QQQ ETFs. QQQ is up 29.73% while ARKK is down 14.34%.

An important issue, which I will discuss later, is that ARKK reached a peak on 2/12/2021 at $156.58 and closed on 12/3/2021 at $93.53. This represents a drop of 40.27% from the peak. This date of 2/12/2021 is significant and will be discussed later in this article.

Chart 3

Analyzing QQQ Top Holdings

Table 2 shows the top 10 holdings for QQQ as of September 30, 2021, which make up 52.8% of total holdings.

Most of the top holdings as a percentage of assets have high Quant Rankings, including #1 and #2 ranking for Alphabet Class A and C. Nvidia has been strong as a leading company in artificial intelligence (“AI”) and gaming, but there has been risk to the company as its acquisition of ARM Holdings is facing headwinds.

Analyzing ARKK Top Holdings

Companies within ARKK include those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the areas of:

  • DNA Technologies and the “Genomic Revolution”
  • Automation, Robotics, and Energy Storage
  • Artificial Intelligence and the “Next Generation Internet”
  • Fintech Innovation

Table 3 is the current (12/3/21) top 10 holdings for ARKK, showing 1-year stock performance and Quant Ranking based on industry. Currently, only Tesla (TSLA) has positive stock performance and has a Quant Ranking of 4 out of 26 in the "Automobile Manufacturers" industry.

Zoom Video (ZM) fared the worst, with stock down 55.53% for the year followed by Teladoc Health (TDOC), down 53.13%.

In Table 4, I show these top ARKK holdings and the date the stock peaked in 2021. I note the stock price at that date, the current price as of 12/3/21, and the percentage change in stock price from the peak.

Teladoc Health (TDOC), the tele-healthcare provider, peaked as high as $294.54 on 2/8/21 before collapsing 68.6% to $91 – the largest drop from its high of all the stocks in Table 4. Last year, Teladoc purchased Livongo for $18.5 billion in an epic transaction. Now, the market capitalization of TDOC stock trades below its purchase price of Livongo, totaling $14.6 billion.

Zoom Technologies (ZM) was the bellwether of stay-at-home stocks. The video communications company increased by a staggering 400% during 2020. However, 2021 is a completely different story, as Zoom has declined 58.6% since its peak of $444.51 on 2/16/21.

Roku (ROKU) has had a different stock trajectory, as shown in Chart 4. The stock peaked on 2/16/21 at $456.97, as I pointed out in Table 4 above, but then revisited the high on 7/16/21. The stock has dropped 55.0% since its February high to $205.55.

Chart 4

Investor Takeaway

ARKK

ARK believes innovations centered around artificial intelligence, robotics, energy storage, DNA sequencing, and blockchain technology will change the way the world works and deliver outsized growth as industries transform.

ARK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled product or service that potentially changes the way the world works. Companies in ARK’s cornerstone strategy aim to capture the substantial benefits of new products or services associated with scientific research in DNA technologies, energy storage, the increased use of autonomous technology, next-generation internet services, and technologies that make financial services more efficient.

Chart 5 shows ARKK percentage price change, showing a peak in February 2021. This peak is important because it correlates with a drop in Covid cases discussed below.

Chart 5

Chart 6 shows the number of Covid-19 cases in the United States during the same period as in Chart 5 (January 2020-current). We see a peak on January 10, 2021 at 293,566 new cases. On February 9, 2021, the number of new cases, which had been dropping since the peak, dropped below 100,000 cases.

The primary variant that drove COVID-19 transmission in the late Winter and Spring of 2021 was the Alpha variant. Alpha transmission subsided in the United States during the late Spring and early Summer of 2021.

The drop in Covid transmission was followed by relief by businesses and individuals that the lockdowns would soon end. Thus, purchases of tech products that benefited from Covid slowed significantly. This was reflected in quarterly earnings and guidance of the ARKK stock holdings.

When you look at the biggest winners in ARKK, they are overwhelmingly tech companies that help facilitate the stay-at-home economy, and can be viewed as a Covid stock.

Number of New Covid-19 Cases

Chart 6

But the main question is the ARKK ETF’s relevance beyond the pandemic lockdowns. According to Seeking Alpha’s ETF Factor Grade, ARKK is rated:

  • F- Momentum
  • F- Expenses
  • A+ - Dividends
  • F – Risk
  • C – Asset Flows

The subtitle of this article was originally “Cathie Woods Needs Another Covid Lockdown for ARKK to Succeed." The factors that contributed to ARKK’s success in 2020 are no longer in play. Long term, we need to look at individual stocks in the holdings.

My contention is that yes, the ARKK holdings may be disruptive, but they achieved their distinction during the global shutdown when work/study/stay at home decrees dictated a change in the lifestyle of workers and students. That gave rise to a demand for products such as PCs, video conferencing, and even exercise equipment with gyms shut down.

That means that these stocks need a double-digit price increase going forward just to go back to zero growth for the year. Could it be done? Yes, but remember that these companies had competition in the years prior to the shutdowns, and these competitors had not stood still, but have adjusted their business models because of competition from these ARKK stocks.

For example, there’s a market full of alternatives to Square out there for an investor to choose from. There are many point-of-sale companies that allow one to harness the power of smart devices to convert them into fully functional points of sale. And there are also Square competitors that don’t require you to have access to a smart device for their product. Leading competitors include:

  • Intuit QuickBooks GoPayment (INTU), +78.16% for the 1-year period
  • PayPal Here (PYPL), -14.27%
  • ShopKeep, acquired by Lightspeed (LSPD) announced post-lockdown in 11/21, -27.06%
  • Shopify (SHOP), +32.68%
  • Stripe, issuing IPO post-lockdown
  • Clover, subsidiary of Fiserv (FISV), -13.40%

QQQ

According to Seeking Alpha’s ETF Factor Grade, QQQ on the other hand, is rated:

  • A+ - Momentum
  • B- - Expenses
  • A - Dividends
  • D – Risk
  • A+ – Asset Flows

Again, as shown in Chart 3 above, QQQ is up 29.73% while ARKK is down 14.34%. On a longer-term basis, Chart 7 shows the performance for both ETFs for a 5-year period. Here we can see that the 5-year growth for QQQ growth is 236.9% and does not have the volatility exhibited by ARKK, which has a 5-year growth of 414.5%.

Chart 7

Chart 8 shows the performance for both ETFs for a 10-year period. Here we can see that the 10-year growth for QQQ is 304.0% and does not have the volatility exhibited by ARKK, which has a 10-year growth 407.3%.

Chart 8

Illustrating the volatility of ARKK, the ETF stock price decreased from 414.5% for a 5-year period to 407.3% for a 10-year period. QQQ on the other hand, increased from 236.9% a 5-year period to 304.0% for a 10-year period.

Thus, ARKK exhibited negative growth in the first five years of the 10-year period in Chart 8 while QQQ grew 68%. In the past year, ARKK is down 14% while QQQ is up 30%. The low volatility of QQQ makes it the better choice for long-term investors.

This free article presents my analysis of this semiconductor sector. A more detailed analysis is available on my Marketplace newsletter site Semiconductor Deep Dive. You can learn more about it here and start a risk free 2 week trial now.

This article was written by

Robert Castellano profile picture

Semiconductors, Solar, Expert Witness

Contributor Since 2006

Dr. Robert N. Castellano, is president of The Information Network www.theinformationnet.com. Most of the data, as well as tables and charts I use in my articles, come from my market research reports. If you need additional information about any article, please go to my website.

I will soon be initiating an investor newsletter. Information to register will be online on my website.

I received a Ph.D. degree in chemistry from Oxford University (England) under Dr. John Goodenough, inventor of the lithium ion battery and 2019 Nobel Prize winner in Chemistry. I've had ten years experience in the field of wafer fabrication at ATT Bell Laboratories and Stanford University.

I have been Editor-in-Chief of the peer-reviewed Journal of Active and Passive Electronic Devices since 2000. I authored the book "Technology Trends in VLSI Manufacturing" (Gordon and Breach), "Solar Panel Processing" (Old City Publishing), "Alternative Energy Technology" (Old City Publishing). Also in the solar area, I am CEO of SolarPA, which uses a proprietary nanomaterial to coat solar cells, increasing the efficiency by up to 10%. I recently published a fictional novel Blessed, available on Amazon and other sites.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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