Cathie Wood’s multi-billion dollar ARK Innovation ETF (ARKK) has become one of the most popular exchange-traded funds (ETFs) in the market over the past couple of years. Throughout the COVID-19 pandemic, ARKK and her other actively managed ETFs were some of the best-performing funds in the market and drew a sizable retail audience.
That said, the ARK Innovation ETF is trading about 14% lower so far this year amid concerns over inflation and economic malaise. As a result, many retail investors are looking elsewhere for opportunities that take advantage of the current sector rotation out of technology stocks and into other corners of the market where opportunities may exist.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
Goldman Sachs' Future Tech Leaders
Investors seeking the same tech theme with different leadership may want to consider the Goldman Sachs Future Tech Leaders Equity ETF (GTEK). Like the ARK Innovation ETF, the fund seeks to invest in technology companies with market capitalizations of less than $100 billion, aiming to provide exposure to the next generation of leaders.
The fund’s most significant holdings include:
- Marvell Technology Inc. (MRVL)
- MercadoLibre Inc. (MELI)
- HubSpot Inc. (HUBS)
- Kingdee International Software Group
- Silergy Corp.
By comparison, the ARK Innovation ETFs most significant holdings are:
- Tesla Inc. (TSLA)
- Roku Inc. (ROKU)
- Teladoc Health Inc. (TDOC)
- Square Inc. (SQ)
- Zoom Video Communications Inc.
Since GTEK just launched, the fund has no prior track record to rely on. Still, the fund says that it depends on a deep bench of 80+ experienced analysts worldwide, conducting active, bottom-up security selection with a strong valuation discipline to identify the highest conviction technology investment ideas globally.
Looking for Smaller Opportunities
Wall Street frequently neglects small- and micro-cap companies, but they can still be strong performers. For example, small-cap growth stocks were up 16.5% during the first half of 2021, while small-cap value stocks performed even better with 30.6% gains. And the outperformance of smaller stocks isn’t an unusual phenomenon – it’s relatively common.
Some of the top-performing active ETFs this year include:
- Avantis U.S. Small Cap Value ETF (AVUV)
- Ballast Small/Mid Cap ETF (MGMT)
- AdvisorShares Dorsey Wright Micro-Cap ETF (DWMC)
Many small companies are names that you might recognize, such as Build-a-Bear Workshop Inc. (BBW) or Lands’ End Inc. (LE). These companies don’t command the same multi-billion dollar valuations as Wal-Mart Inc. (WMT) or Amazon.com Inc. (AMZN), but their smaller size makes it possible to grow faster (it’s easier to double $1M than $1B).
Of course, small- and micro-cap stocks tend to be more volatile than larger companies. As a result, investors should ensure that they invest in ETFs with diversified portfolios to mitigate these risks. But even then, these funds may be less liquid and more volatile than their larger counterparts, translating to some increased risk.
Capitalize on Cyclical Trends
Not surprisingly, the top-performing actively managed ETFs in 2021 are energy funds. After all, the price of natural gas has risen more than 125% so far this year, and crude oil isn’t far behind, with gains of more than 50%. As a result, investors that are confident in cyclical trends may want to consider funds active in the commodity markets. For instance, actively managed Invesco Optimum Yield Diversified Commodity Strategy ETF (PDBC) has been a top performer this year.
In addition to generating solid returns, this type of funds aim to mitigate the effects of inflation by providing continuous exposure to commodity prices. These attributes are particularly valuable in today’s environment when investors are increasingly concerned about rising inflation. But, of course, the risk is a secular decline in commodities compounded by any leverage.
The Bottom Line
Cathie Wood’s ARK Innovation ETF (ARKK) has been a strong performer over the past couple of years, but recent declines have prompted investors to look elsewhere for better opportunities. In addition to Goldman Sachs’ take on the next tech leaders, investors may want to consider smaller companies or capitalizing on cyclical trends.
Regardless of the fund, investors should be mindful of each fund’s expense ratio and risk characteristics (e.g., beta or Sharpe ratio and diversification) before committing any capital.
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