Technology stocks have soared over the past five years as the artificial intelligence (AI) boom has taken shape. That’s sent many technology exchange-traded funds (ETFs) rising, along with the broad S&P 500. But not everyone has benefited equally. In fact, some tech ETFs have performed poorly despite the widespread benefits of AI stocks.
One such technology ETF that’s one of the worst-performing is Cathie Wood’s ARK Innovation ETF (NYSEMKT: ARKK). The fund’s share price is down 28% over the past five years, compared to the S&P 500’s gain of 86%. Even if it’s not the worst-performing tech ETF, it’s certainly one of the worst, and a significant disappointment for many investors.
Here’s why it has failed to keep pace, and why the Vanguard Information Technology ETF (NYSEMKT: VGT) is a better tech fund to own.
One of the key reasons why ARK Innovation has performed poorly compared to the S&P 500 benchmark and amid so many rising tech stocks is that the fund is highly concentrated in a small number of stocks. For example, its top 10 holdings account for more than half of the entire fund’s weight.
What’s more, some of its holdings are in highly speculative and unprofitable companies. Consider that 2% of the fund is in Archer Aviation, the electric vertical take-off and landing (eVTOL) company, which has yet to generate revenue or profit. Archer’s stock is very volatile, and over the past five years, its share price is down 15%.
While there have been some winners in the fund — Tesla is the fund’s top holding and has returned 126% over the past five years — they haven’t been enough to offset the losses from its more speculative investments.
One of the main reasons why the Vanguard Information Technology ETF is such a good alternative is because it’s a well-diversified fund that still benefits from the biggest tech trends. The fund tracks the MSCI US Investable Market Information Technology 25/50 Index, which is composed of 300 small- to large-cap companies, ensuring that you have exposure to tech leaders and disruptors at the same time.
