In a volatile market, should investors bet on America with the Vanguard S&P 500 ETF or Cathie Wood’s high-growth ARK Innovation ETF?
Jan. 19, 2022
Exchange-traded funds (ETFs) are a mechanism that allows investors to buy a basket of stocks in an individual purchase and these funds are either passively or actively managed. An ETF provides advantages such as providing instant diversification and typically greater stability than individual stocks.
We take a look at the ARK Innovation ETF (NYSEARCA: ARKK) and the Vanguard S&P 500 ETF (NYSEARCA: VOO) and ask which is a better buy today?
ARK Innovation ETF: Bull vs Bear arguments:
ARK Innovation ETF is ARK’s flagship fund and is actively managed by famous investor Cathie Wood. The fund focuses on “disruptive innovation”, which it states are technologically enabled products and services that potentially change how the world works. These include genomics, fintech, robotics, and more.
The fund comprises 44 stocks, with Tesla the largest holding with a weighting of 8.29%. Wood has been a Tesla fan for many years and predicted back in 2018 that Tesla would reach $4,000, which it did just two years later on a split-adjusted basis. Other top five holdings in order include Zoom, Teladoc, Roku, and Coinbase, which all have tremendous upside potential.
Since its inception, the fund’s performance is also impressive, returning roughly 300%, and Wood has re-iterated that ARK invests with a five-year time horizon.
However, the ARK ETF has some fierce critics, with others in the industry calling ARK’s stocks a “ticking time bomb”. Many of these companies are also trading at high valuations which could cause the fund to experience further downside in 2022. There is also an expense fee of 0.75% because it is actively managed.
Vanguard S&P 500 ETF: Bull vs Bear arguments:
The Vanguard S&P 500 Index aims to mirror the performance of the S&P 500, which includes the 500 largest companies in the U.S.
The ETF has returned roughly 16.5% annually over the last ten years which has beaten the historical average of the S&P 500, which has returned an average of 10.5% since inception. Regardless, it is likely to grow steadily in the years, and all that is required is some patience.
Technology is currently the sector with the highest representation in the fund, with Apple, Microsoft, and Alphabet making up the top three holdings. The median market cap is also $238 billion, meaning the ETF is likely to be relatively stable. The fund also has a low expense rate of 0.03% a year due to it being passively managed.
However, it is likely that the fund will experience a decline when the U.S. economy does so. If you do not believe in the long-term prospects of the U.S. economy, you may want to reconsider investing in this ETF.
So, which ETF is a better buy right now?
Although ARK Innovation ETF may likely see some further downside in the near term, I believe that it appears to be a better investment today due to the potential upside. However, the Vanguard S&P 500 is a better bet for a safe and steady play.