Buy ARK Genomic Revolution ETF? Risk & Return Analysis [2022]

Happy Investors

Dear Happy Investor, are you considering buying ARK Genomic Revolution ETF? If so, read this ARKG analysis first. The fund contains serious risks that you should be aware of before you want to buy ARKG. 

A brief ("open door") summary of this analysis is as follows:

Why buy ARK Genomic Revolution? Answer: potentially higher returns

Why not buy ARK Genomic Revolution? Answer: high risk with potential money loss

In this ARKG analysis, you will find an explanation of the pros and cons. For example, we go into more detail about the risks. This is important to understand. Buying ARKG is definitely not for everyone! In addition to the risk analysis, we will also look at the (historical) return and the price outlook. 

Why (not) buy ARK Genomic Revolution ETF (ARKG)? Pros and cons


What exactly is ARK Genomic Revolution ETF? It is an Exchange Traded Fund with active management. The objective of this management is to achieve long-term capital growth within the theme of "genomic revolution". This includes forward-looking trends such as CRISPR, DNA therapy, pharmaceutical innovation, and bioinformatics.

In short, the fund seeks capital growth within the future healthcare industry. 

This leads to a major advantage, namely: early investment in future trends can lead to high returns. Evidently, the biggest disadvantage to ARKG is that it is primarily "speculation" where the probability of success is relatively low. In other words: high risk. 

So why buy ARK Genomic Revolution ETF anyway? Well, if you believe in the management and they can select the right growth companies. And that you expect that these companies will become leaders in the next decade. In that case, a small investment can be interesting. 

Below we will look at the risks, such as the top 10 holdings.

First, some relevant key figures from this ARKG analysis (download the fact sheet for up-to-date figures):

  1. Total return since inception (2014): 27.20%
  2. Total return last 5 years: 42.54%
  3. Dividend rate: 0%.
  4. Number of positions: 40 - 60
  5. Total expense ratio: 0.75%
  6. P/E ratio: N/A
  7. Risk category: see risk analysis below!

ARKG definitely doesn’t fit our requirements to be considered as the best things to invest in. 

Risk Analysis Ark Genomic Revolution ETF (ARKG)

The prospectus of ARK Genomic Revolution ETF lists many risks. You should read this before you decide to invest. However, it is large list. Below I make an attempt to name the most relevant risks.

These are some of the major risks of ARKG:

  1. Speculative nature: many of the companies within the fund have never been profitable!
  2. 54% of all companies have a market capitalization of
  3. It is a theme ETF with 94% focused on the healthcare sector
  4. 87% of all companies are primarily located in the United States (and given these are smaller companies they have fewer to limited international sales)
  5. Economic and political developments: in particular rising inflation and interest rate increases will have a negative impact on the growth stocks in ARKG

source: ARKG factsheet 2021

Risk analysis TOP 10 holdings ARKG

 

Source: ARK website, October 10, 2021

This tracker for innovation within the healthcare industry tracks the stock price of 60 biotech companies. The top 10 has a weighting of about 40%. In particular, Teladoc Health (TDOC), which has fallen a lot recently, has a large position. In this case, that could be beneficial, where TDOC now has a more favorable financial valuation relative to early 2021. 

A sampling of ARKG holdings shows how speculative this fund is. Ionis Pharmaceuticals, Fate Therapeutics, Twist Bioscience. These are wonderful, innovative companies working on the technology of tomorrow. The question, however, is whether they will be successful. Can they package its innovation into a commercially scalable product? And do so within a profitable revenue model? 

It is important to understand these stocks before making an investment. 

As the risk is very high, you might want to consider lower-risk ETF’s. For example, check out our TOP 10 best Dividend ETF’s as a more sustainable long-term investment. 

Return and price expectation of ARKG ETF


In the analysis of ARK Innovation ETF, we compared different ARK ETFs on (historical) returns. The ARK Genomic Revolution ETF had the second-worst performance. Compared to other ETFs, however, its return is very good.

See the chart above. Had you invested in 2014, you would be at only 35% return during the covid-19 crash. All in all, not a bad performance. Only after the covid-19 did the stock price explode, bringing the average return since inception to 27%.

In my opinion, the current price chart misrepresents the expected return with the ARKG ETF. Personally, I expect a lower average return over a 20-year time frame. Theoretically, 11 - 15% would already be high. On the other hand, companies are growing faster and faster. Partly due to globalization and the World Wide Web.

In mid and late 2021 a correction is underway. With rising interest rates (political) and deterioration of the economy, this correction may continue into 2022. In addition, a large part of the holdings has a relatively high financial valuation. It is completely focused on growth. And that could turn out to be wrong.  

In terms of price expectations, you should expect higher returns in the long run. This could be as long as 5 years. Why? Because the ETF is essentially focused on growth with high risk. The price will fluctuate heavily, but there is a chance for potentially higher returns compared to the S&P 500. Of course, this also means that this fund may not perform as well.   

In the conclusion, I will end with a guideline for inspiration on when to buy ARKG. 

Conclusion: to buy or not to buy Ark Genomic Revolution ETF?

As a long-term investor, do we want to buy ARK Genomic Revolution ETF? Answer: only if you want to take a high risk, this can be an interesting investment. Please note that this is not a buy recommendation!

To reduce the risk, there are a few necessary measures:

  1. Invest a maximum of 5 - 10% of your investment capital in this high-risk tracker (guideline)
  2. Buy structurally when the price of the tracker falls by (more than) -15%.
  3. Hold for the long term, at least 5 years but ideally more than 10 years

Before the covid-19 crash, ARKG shares were listed at around $38. Today, the listing is $72 per share. That's a price increase of ±90% in a year and a half. ARKG has fallen by -35% from its peak in 2021 to the present. Despite this steep decline, it is likely that the stock price will continue to fall. This is my assumption based on this ARK Genomic Revolution ETF analysis.   

Disclaimer: none of this is a buy recommendation. Please know that I myself have recently started buying ARKG stock. I would like to build the position to a maximum of 2.5% of my total investment portfolio. Also know that I consider myself a risky long-term investor, despite this being an ETF 😉 .

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