HEAD-TO-HEAD: ARK Innovation ETF versus Fidelity Blue Chip Growth ETF

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Investment approach

ARK’s firmwide investment philosophy has some merit, Greengold said. It is benchmark-agnostic and invests across five technology platforms — artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics — which its investment team thinks will revolutionize how economic sectors across the globe operate.

“It shoots for high returns by investing only in companies it thinks will gain 15% or more annualized over the next five years, trading in and out of stocks, and during market crises concentrating the portfolio to around 30 ‘pure plays’, which are often unprofitable small caps that are less liquid and extremely volatile,” he explained.

However, Greengold pointed out that the firm lacks a robust approach to mitigating risk. The portfolio manager Cathie Wood relies on her instinct rather than data or rules. The firm, which has no risk management personnel and vaguely defined risk controls, views the subject almost exclusively through the lens of its bottom-up stock research.

“But this provides little visibility into the portfolio’s aggregate risk exposures, which can make or break a fund’s returns during one market environment or another. The firm is poorly positioned to prepare and react,” he said.

“After growing its assets to roughly $80bn as of February 2021 from less than $12bn a year earlier, the firm faces new risks that it seems to manage haphazardly.”

Fidelity Blue Chip Growth ETF’s manager Sonu Kalra believes stock prices follow earnings, and he looks for firms that can grow their earnings by at least 10% over the long term, according to Greengold.

“He prefers companies with sustainable business models, improving return on equity and return on invested capital, and increasing market share, while also considering product cycles, management changes, and turnaround stories,” he said.

Despite its moniker, this strategy isn’t solely focused on blue chips. Kalra invests 70%-80% of the portfolio in what he thinks are secular-growth firms benefiting from sustainable tailwinds. He supplements them with cyclical picks and opportunistic plays that may not be considered traditional blue chips, particularly within technology and biotechnology, where he draws on his past experience as manager of Fidelity OTC FOCPX, according to Greengold.

Kalra aims to balance the portfolio diversifying among sectors. For instance, he tries to avoid simultaneous over-weightings to the technology and industrials sectors because it would be too big of a bet on cyclical names. “He has distinguished the strategy so far with solid results from a total-return perspective, but the process tends to yield an undesirable risk profile,” said Greengold.

Fund characteristics

Sector allocation:

Source: Morningstar, 31 December 2021

Top 10 holdings:

Source: Morningstar, 31 December 2021

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