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ARKK vs. ARKF: 2 Innovation ETFs to Play a Rebound
Stock Analysis & Ideas

ARKK vs. ARKF: 2 Innovation ETFs to Play a Rebound

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Cathie Wood’s ARK funds have been through a horrific downturn. However, with Wood calling for disinflation, her line of funds may be ready to rip higher.

In this piece, we’ll stack up the flagship ARK Innovation Fund (NYSE:ARKK) against ARK Fintech Innovation (NYSE:ARKF). ARK Invest’s Cathie Wood has been through good times and bad. The historic 2021 rise of the broader ark of ETFs is unprecedented, and the upward surge really put her on the map with many growth-focused investors looking to capitalize on a wide range of disruptive technological trends.

However, action in late 2021 and 2022 have been a rude wake-up call for ARK investors. Despite nose-diving more than 70%, many dedicated investors remain loyal to the flagship ARKK fund. Cathie Wood has been trying to comfort investors amid the horrific tech-centric sell-off. Still, it will be an uphill battle to claw back the losses from this year as the Federal Reserve continues increasing interest rates.

While rumors of rate cuts could lift the tech trade and the broader basket of Ark ETFs, I think investors should only place a bet if they believe in the stocks within each ETF. Many constituents aren’t yet profitable, and they may not be profitable for many years. Such a lack of profitability prospects is of huge concern in a higher-rate world.

In any case, I think such concerns are starting to get overblown. With Cathie Wood pointing to deflation (rather than inflation), the battered tech trade may finally have the means to bottom out and power higher over the next five years and beyond.

Undoubtedly, disruptive technology can have a disinflationary impact on the economy. That said, it takes time for such effects to work their magic. In any case, inflation looks to have peaked, and it may be in a spot to collapse, as Wood and Credit Suisse seem to believe.

Doubt the Ark funds for their recent underperformance, if you will, but I think Cathie Wood’s line of ETFs is now one of the most intriguing (and still exciting) ways to go against conventional wisdom. Investors hate growth right now, but if inflation rolls over and tech turns a corner, the Ark lineup could lead a recovery.

As the Ark funds sunk, Wood has been busy buying the dip. Such furious dip-buying could cause ARKK to bounce far sharper than it would have otherwise.

ARK Innovation Fund

The ARK Innovation Fund has been on a treacherous ride. Though shares look to have bottomed out at around $36 per share, it seems likely that the ETF will be unable to escape the gravitational pull of rates.

In any case, shares seem to have been oversold in anticipation of much higher rates. Whether 3% or 4% rates are baked in, I think the flagship fund, which provides broader exposure to many technological trends touted by Wood, may be close to reversing.

Undoubtedly, the ARKK fund has seen more than its fair share of changes during the decline. Though the holding allocation hasn’t changed drastically, Wood has been loading up on shares of graphics powerhouse Nvidia (NASDAQ:NVDA) and Zoom Video Communications (NASDAQ:ZM), while dumping shares of popular crypto exchange platform Coinbase (NASDAQ:COIN).

The Coinbase sale was more due to company-specific issues (SEC concerns) rather than broader market factors. In any case, I think such a move was wise, even if it caused her to lock in substantial losses at an inopportune time.

Despite the drastic plunge, ARK remains very much a risk-on contrarian play. With a 1.66 beta and exposure to some of the most battered stocks in the market, ARKK is likely to be in for very wild swings in both directions. If you believe in Wood and want to add spice to your portfolio, her fund may prove a great buy at current levels.

ARK Fintech Innovation

The fintech-flavored ARKF fund may be a more interesting choice for investors looking to bet on tech firms as they look to disrupt the banking scene as we know it. Undoubtedly, the fintech fumble has been one of the most painful, with even established firms like Block (NYSE:SQ) experiencing amplified downside.

After regaining some ground, the ARKF fund is down just north of 69%. With numerous unprofitable financial tech firms that could be bested by the more innovative big banks in a higher-rate environment, I view the ARKF ETF as a tad riskier than Wood’s flagship ARKK fund.

The future for fintechs is uncertain, and their disruptive capabilities may still be overblown, especially when you consider many big banks are investing heavily in technological trends to defend their turf.

Though not all ARKF constituents are destined to become neobanks, I think there are way too many unknowns for the broader basket of fintech firms that may ultimately be disrupted by the big financial institutions they seek to disrupt.

Better Buy: ARKK or ARKF?

ARKK and ARKF are two ETFs in the blast zone of the tech sell-off. While each fund may be worth nibbling on weakness, I think ARKK is a better bet. You’ll get fintech exposure and other trends that I believe could prove more bountiful over the long haul. As always, give the holdings a look before considering initiating a position in either fund.

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