Growth stocks in the S&P 500 are back and tech is hot — playing right into Cathie Wood's hands. But even the famed investor can't outperform a cheap index.
Wood's flagship ARK Innovation ETF is having a good year — up 12.74%, making it the tenth-best diversified ETF this year. But the popular fund is still trailing behind the popular $167 billion-in-assets Invesco QQQ Trust, which is up 17.3% this year, says Morningstar Direct.
And it's not just this year that ARK Innovation is lagging the QQQ, which simply owns the 100 largest nonfinancial stocks trading on the Nasdaq. ARK Innovation also trails the Nasdaq 100 in both the past three and five years as well. And get this: QQQ only charges 0.2% annually, or 73% less than ARK Innovation's 0.75% fee. That's not to mention the cheaper version of QQQ, Invesco Nasdaq 100 ETF, which costs just 0.15%.
It shows how the top-heavy market — dominated by just a handful of giant stocks — is throwing off even experienced investors.
"We have seen megacap companies found in growth ETF QQQ to be stronger performers in 2023 than more moderately sized companies more commonly found in disruptive technology ETFs," said Todd Rosenbluth, director of research at VettaFi.
Rise Of Big Cap Tech
Why such a disconnect between ARK Invest and QQQ when growth is in again? Think big-cap tech, says Rosenbluth.
Just six stocks, all of which are also in the Nasdaq 100, are driving 80% of the S&P 500's gains this year. That includes Apple, Microsoft, Meta Platforms, Nvidia, Amazon.com and Alphabet. All are racing higher this year.
These six stocks also collectively account for 50% the value of the Nasdaq 100. But not one of them is in ARK Innovation. That omission is costly now. Take Meta, a social media giant that's reorganizing itself to lower costs. Shares are up 99% this year, pushing the company's value to $616 billion. That's significant as it means Meta is now more valuable that Tesla, which is ARK Innovation's most important holding at 9.7% of the portfolio.
ARK Lagging QQQ Long And Short Term
| ETF | Symbol | YTD return | 3-year annualized return | 5-year annualized return |
|---|---|---|---|---|
| Invesco QQQ Trust | 17.3% | 14.1% | 14.8% | |
| ARK Innovation | 12.7 | -12.1 | -1.0 |
Source: Morningstar Direct
Lighting Up The Future
Tesla has done well, it's up 22.7%, but it's still lagging most of the Nasdaq giant. Apple, Nvidia and Amazon are up 29%, 85.5% and 30.9% respectively. The Nasdaq 100, which also owns Tesla, is up 14.11% and 14.82% in the past three and five years annualized. ARK Innovation is down 12% and 1% during the same periods
So while growth stocks are indeed back, they're not all back equally. "Growth investing comes in many shapes and sizes and it is important for investors to understand what they own," Rosenbluth said.
Biggest S&P 500 Gainers All Nasdaq Giants
None of the top performers this year are in ARK Innovation
| Company | Ticker | % of S&P 500's gain this year | Weight in Nasdaq 100 |
|---|---|---|---|
| Apple | 25.2% | 12.6% | |
| Microsoft | 20.1% | 12.6% | |
| NVIDIA | 13.1% | 5.1% | |
| Meta Platforms | 12.5% | 3.7% | |
| Amazon.com | 11.3% | 6.3% | |
| Alphabet | 9.3% | 7.6% |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
