ARKW: Big Bet On Crypto Shifts Risks Beyond Internet Stocks (NYSEARCA:ARKW)

The ARK Next Generation Internet ETF (NYSEARCA:ARKW) is on a comeback trail with the actively managed equity strategy returning 55% return over the past year, ahead of tech-heavy benchmarks like the Nasdaq-100 (QQQ).

The momentum at least offers some reprise for long-time shareholders who went through a period of extreme volatility where ARKW saw an -80% drawdown through 2022 following the post-pandemic era crash. We last covered the fund back in 2020 with a sell rating at the time, and for what it’s worth, shares are still down by -20% since.

While ARKW still holds many of the same stocks from four years ago, we find a new focus on digital assets and blockchain technologies central to the “next-generation internet” theme. This positioning as a big bet on Bitcoin (BTC-USD) and the crypto market has helped drive the fund higher this year but has also added a layer of concentration risk.

Ultimately, ARKW still has a lot to prove to rebuild its stock-picking credibility. We’re not convinced the current portfolio will be a long-term winner from here and expect renewed volatility going forward.

ARKW’s Big Bet On Digital Assets

ARKW invests in companies expected to benefit from internet-based products or services. The strategy here has a broad scope allowing the management team at Ark Invest to build a portfolio that is largely unconstrained in terms of the types of tech companies covering everything from big data & artificial intelligence, cloud computing, cyber security, e-commerce, social media, mobile technology, and the blockchain.

Coinbase Global, Inc. (COIN) is the largest holding with a 10% weighting. This is followed by the “ARK Bitcoin ETF” referencing the company’s own ARK 21Shares Bitcoin ETF (ARKB) which tracks the spot price of Bitcoin, also representing 10% of the fund.

If we include names like Block, Inc. (SQ) and Robinhood Markets, Inc. (HOOD) in the 3rd and 4th position, which have a high level of exposure to crypto trading, nearly one-third of the portfolio is a direct or indirect bet on digital assets.

Naturally, the setup implies ARK has a high level of conviction toward crypto, which is fine, but it’s also important for prospective investors to recognize what they’re getting.

Down the list, the portfolio with just 46 total holdings is composed of a combination of large-cap tech leaders as well as more emerging names. We find names like Tesla, Inc. (TSLA) Meta Platforms, Inc. (META), Cloudfare, Inc. (NET), DraftKings Inc. (DKNG), Palantir Technologies Inc. (PLTR), The Trade Desk, Inc. (TTD), and MercadoLibre, Inc. (MELI) among others.

Overall, the different types of companies are a good representative of the “internet” theme while notably leaving out key mega-cap tech names. The result here is that ARKW delivers a distinct return and risk profile.

ARKW Performance

We mentioned that ARKW has outperformed over the past year, although that doesn’t tell the full story. The fund has returned a cumulative 369% since its inception date in 2024, which is favorably above the 371% return of QQQ over the period. ARKW is also well ahead of the ARK Innovation ETF (ARKK) which is from the same fund family but takes a broader approach beyond just internet technology.

At the same time, ARKW has trailed the Technology Select Sector SPDR ETF (XLK), which returned 479% through the near 10-year timeframe which we believe is a better performance benchmark. In this case, the actively managed strategy has simply failed to keep up with the indexed fund tracking tech stocks within the S&P 500.

We can also say from the performance history that ARKW tends to outperform to the upside during bull markets which was the case in 2020 when the fund delivered a spectacular 157% return.

Fast forward, it’s been a more sobering record more recently with ARKW still down -45% over the past three years compared to a 55% return by XLK. What we find is that many of the names ARKW has been invested in since 2021 or earlier reached extreme valuations during the height of the pandemic-era boom, but have thus far failed to live up to those expectations.

Our main knock on ARKW is that despite being actively managed with the flexibility to make regular portfolio adjustments, many holdings are down by more than -60% from their highs. The implication is that the team was unable to identify some major market turning points and company-specific fundamental factors that could have been better managed.

So while valuations have been reset lower and it’s still possible these names rebound higher, it will likely be a long road to reclaim their all-time highs.

We’d go a step further to claim the performance here is a poor testament to Ark’s stock-picking ability which hasn’t generated the excess level of returns needed to warrant its 0.87% expense ratio. On that point, we’d also note that ARKW has underperformed year-to-date.

What’s Next For ARKW?

The problem we see when looking at ARKW is that by attempting to touch on the various corners of its internet innovation, the strategy is spread thin and misses out on being strong in any one key area.

The bullish case for the fund based on today’s allocation is that rally in Bitcoin and crypto-related names like Coinbase to continue outperforming given the fund’s overweight exposure to that segment.

Still, we’d argue that an investor who is very bullish on Bitcoin or crypto would be better served by a more focused fund like the VanEck Digital Transformation ETF (DAPP) or the Bitwise Crypto Industry Innovators ETF (BITQ) to express that strategic or tactical view.

On the other hand, the rest of the portfolio with a selection of otherwise unrelated software and internet names doesn’t necessarily stand out as a combination that is set to lead the broader market higher.

What’s more likely to happen is that the ARKW portfolio through its high-beta names would face a deeper selloff in a risk-off environment, underperforming more diversified tech and growth indexes to the downside.

This bearish scenario could evolve either through some sort of macro deterioration where financial conditions see renewed volatility. There is also a path for Bitcoin to become disconnected from tech and correct lower which would be a drag on ARKW’s exposure.

Final Thoughts

With a nearly 10-year track record, we don’t see ARKW as a good option for investors compared to vanilla low-cost indexed tech or growth funds.

Despite the fund’s rally over the last several months, ARKW remains a speculative fund and could face higher levels of volatility during the next down market. Our call is for ARKW to underperform benchmarks going forward.

The strategy’s overweight pivot toward crypto over the past year has shifted the fund’s risk profile beyond just the traditional tech sector investors should be aware of.