Should investors buy the ARK Innovation ETF now?

Call it a “personality fund” if you like. Some investors holding Ark Investment Management’s ARK Innovation ETF (NYSEARCA:ARKK) are in the trade simply because they trust the company’s CEO, Cathie Wood. Both the fund and its founder have been making headlines, but undoubtedly not all shareholders are pleased with the ARKK ETF’s recent volatility.

The old saying that volatility brings opportunity may or may not apply here. After all, just because asset prices have fallen doesn’t necessarily mean they’re cheap. Nonetheless, for investors who prefer stocks and companies with certain characteristics, this may be a great time to “join ARKK,” so to speak.

Is there a problem with the blockchain?

First things first: If you want to own the ARKK ETF, you better be a fan of blockchain and cryptocurrencies. Wood is an unabashed cryptocurrency believer who suggested Bitcoin (BTC-USD) could rise to $3.8 million.

As a result, it makes sense that the ARKK ETF would include a number of blockchain-friendly components. In fact, the top 10 stock holdings by weight include Coinbase Global (NASDAQ:COIN), Block (NYSE:SQ), and Robinhood Markets (NASDAQ:HOOD), which facilitate both stock and cryptocurrency trading. Additionally, there is Roblox (NYSE:RBLX), which can be considered a metaverse company.

Apparently Wood & Ark Investment Management is really Like Coinbase. COIN stocks make up 10% of the ARKK ETF’s holdings. Adding SQ and HOOD stocks to COIN makes it over 20% of the fund.

Of course, you don’t have to agree with Wood’s $3.8 million Bitcoin price prediction to own the ARKK ETF. But it definitely helps if you’re a bit of a proponent of blockchain.

This means it can handle a certain amount of volatility. To some extent, Coinbase stock follows Bitcoin’s price movements, and Bitcoin moves quickly. Specifically, COIN stock’s 5-year monthly beta is 3.42. This basically means that the stock moves more than three times faster (in both directions) than the benchmark S&P 500 (SPX) index. And again, this stock represents 10% of the fund’s weight.

Choose momentum over value

You may have heard that Wood and Ark Investment Management bought Tesla (NASDAQ:TSLA) stock when it was down. Don’t get the wrong idea from this. Wood may be a deep buyer at times, but that doesn’t automatically make her a value investor.

By and large, the top 10 stocks in the ARKK ETF are momentum stocks, not value stocks. Consider Tesla stock, for example. It is the fund’s second-largest holding, at 8.5% of ARKK’s weight.

TSLA stock is definitely down so far this year. But that doesn’t make the stock a bargain. Currently, Tesla’s GAAP 12-month price-to-earnings ratio (P/E) is 37.55. For reference, the industry average P/E ratio is 17.1.

On the other hand, Coinbase, which has a higher weight than Tesla in the ARKK ETF, is the exact opposite of trading. Believe it or not, Coinbase’s P/E ratio is nearly 600, while the sector average is 10.66.

Wait. The situation is getting worse. As of this writing, Square’s P/E ratio is 4,579.72. But what difference will it make if Bitcoin grows to $3.8 million? If Wood is right, we could all become blockchain millionaires.

The point here is not to mock Wood, but to warn potential investors that the ARKK ETF is not ideal for value-driven people. If momentum is your concern, you may perhaps overlook the high valuations of some of the fund’s holdings.

Risk of Risky Assets

More than momentum (and more than “innovation”), the common themes of the ARK Innovation ETF are: in danger. The fund’s constituents will perform well when the market is in a risky mood. When traders feel risk averse, the ARKK ETF will not perform well.

As you probably already know, taking risks is risky. Inflation is on the rise again. The Federal Reserve may end up keeping rates high for longer than many stock traders expected. Momentum stocks have shown signs of instability recently.

However, if you want to hold the ARKK ETF, it’s natural to feel shaken up. There will be big up moves and big down moves and the current trend is down. Are you in a state of panic?

If so, Wood’s fund probably isn’t right for you. However, if you are a true Bitcoin believer and can forgive triple- and quadruple-digit revenue multiples, I encourage you to “get on board with ARKK” with a carefully considered stock position.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.