ETF.com’s “ETF of The Year” award went to the ARK Innovation ETF (ARKK) for 2017. The award was given to ARKK for a number of reasons, but the top two were due to its exposure to disruptive technology in 2017 and its strong performance. Both of those key metrics for winning the award were partly due to the fund's exposure to Bitcoin.
ARKK owned Bitcoin through buying shares of the Bitcoin Investment Trust (GBTC). ARKK had anywhere between 6% and 10% of its assets in GBTC during 2017 while the cryptocurrency rose higher during the end of last year. During that time Bitcoin was often ARKK’s top holding. This helped the fund produce an 85% return for investors in 2017. Just for comparison, GBTC was up roughly 1,550% in 2017.
What’s more interesting though is that while GBTC is now down more than 65% year-to-date in 2018, ARKK is up more than 21% this year. The main reason for this reversal is because sometime in January of 2018 ARKK’s management team started selling their position in GBTC. As of today, ARKK still has a small position in GBTC, but it represents just 0.26% of the fund's assets.
ARK, the issuer of the ARKK ETF recently told ETF.com that it was a “complicated decision” to cut its Bitcoin investments, but that it was driven largely by regulatory and tax concerns, more so than the true “merits” of Bitcoin.
It should also be noted that in 2017 the only other ETF investors could buy to gain substantial exposure to Bitcoin was another ARK issued and managed ETF, the ARK Web X.0 ETF (ARKW). ARKW was also up more than 80% in 2017, has risen more than 20% thus far in 2018, and currently has just 0.33% of its assets in GBTC.
The performance of both ARKK and ARKW in 2017 and 2018 highlight how a smart and at times slightly lucky management team can provide value for investors when it comes to ETF’s. Anyone who owned either fund in 2017, or up to this point in 2018 is more than happen to pay the 0.75% expense ratio both funds carry.
More so, with the S&P 500 up a mere 2.4% in 2018 and both ARKK and ARKW up more than 20%, it is hard to say that ARK’s investment team was just a one-hit-wonder with Bitcoin and bought and sold at the perfect times.
Having said that, both funds hold shares of Twitter (TWTR) and Square (SQ) in their top ten holdings. These are two stocks that have performed exceptionally well year-to-date, up 83% and 76% respectively. Both of these stocks again show ARK’s management teams value. But, at the same time, both funds have Tesla (TSLA) represent their top holding at 8.16% of assets and 6.20%. While I am a fan of Tesla and a shareholder, this does highlight the fact that while ARK’s management team has made some profitable picks in the past, they do tend to lean say on the dangerous side.
A year ago, Bitcoin was trading around $1,000 per coin, and its future was very much so in question. Around the same time, investors were questioning whether Jack Dorsey was capable of running both Twitter and Square because Twitter was in the weeds and early investors had been burned by a weak share price. Square has for the most part always had a strong life as a public company, but its jump over the last year and a half can largely be contributed to the fact that Wall Street wasn’t sure if the payment processing company could compete with PayPal (PLPY), Visa (V), and the others in a very competitive and crowded space. Lastly, where should we start with Tesla, it’s one of the companies with the highest short interest, the CEO Elon Musk constantly makes promises and then misses his set goals, the company is struggling to become profitable, and most analysts believe there is no way possible that the company will not have to raise a massive amount of debt soon, despite Musk adamantly disagreeing.
My point for the history lesson is that ARK’s investment team may be really, really good, or they could just be on a nice run over the last 12 months. Investors need to be cautious when buying into a “Top Performing” ETF and take a look at how and why the fund achieved that title before buying shares. If the Tesla trade goes bad and I mean really, really, bad, which it certainly could, ARK’s investment team may not look so smart, while their funds and the investors get to pay the price of their risk-taking.
Disclosure: This contributor held positions in Tesla, Twitter, Square, Visa, and PayPal at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.