Is Cathy Wood’s ARKK ETF a Safe Investment?

Cathy Wood, chief executive of ARKK Invest, is a celebrity in the world of finance. Her company offers an array of exchange traded funds (ETF), and the best-known fund among them is the ARK Innovation ETF (NYSEARCA:ARKK).

Wood is known for capturing the headlines, and so is the ARKK ETF. The risk-to-reward profile for the ARK Innovation ETF may seem highly favorable since the price is far below its 2021 peak.

Yet, “safety first” should be the credo of all investors. So, is ARKK safe to buy now? It’s a tough call, but a closer look at Wood’s famous fund should help skittish investors decide whether to dive in or steer clear.

ARKK: The Basics

Even if you align with Wood’s risk-on, technology-focused attitude toward investing, it’s still crucial to know what’s actually in the ARK Innovation ETF. Otherwise, you’re just entrusting your hard-earned capital with other people, which defeats the purpose of self-directed investing.

So, let’s apply the “know what you own” principle and learn the basics of Wood’s fund. According to the fund’s prospectus, the investment theme of the ARK Innovation ETF is “disruptive innovation.” In general, a disruptive business is defined as one that introduces a “technologically enabled new product or service that potentially changes the way the world works.”

The key phrase to note here is “technologically enabled.” As we’ll discuss in a moment, the ARKK ETF is heavily weighted toward technology stocks.

Thus, there’s already a small safety concern. Tech stocks tend to be risk-on assets that move quickly in both directions. In addition, disruptive technologies can succeed or fail spectacularly.

The areas of focus for the ARK Innovation ETF suggest that Wood is interested in risk takers. These areas include genomic sequencing, automation, artificial intelligence (AI), fintech (financial technology), the internet of things (IoT), and energy involving “unconventional sources of oil or natural gas,” among other specializations.

Another concern for safety-minded investors will be the fund’s 0.75% annual management fee (i.e., expense ratio), which is somewhat high in the ETF universe. Moreover, the ARKK ETF pays no dividends, so don’t expect a safety buffer from dividend payments if the share price goes down.

Navigating Choppy Waters with ARKK

Before you “board the ARKK,” so to speak, be sure to check the fund’s historical performance. This will provide critical clues about the ARK Innovation ETF’s propensity for volatility.

During the past five years, the ARKK ETF sailed from less than $50 to more than $150 in 2021, only to cough up practically all of those gains. Lately, the share price has hovered slightly above the $50 level.

That’s a wild ride, and it was undoubtedly stomach-churning for investors who held on from $150 to $50. The risk-to-reward balance seems favorable near $50 in 2025, but the next big move could happen in either direction.

Here’s another way to quantify the ARK Innovation ETF’s historical volatility. The fund’s five-year monthly beta is approximately 2, which means that the ARKK ETF has moved around twice as fast, in both directions, as the S&P 500. That’s fast movement for an ETF, so safety-seeking investors may want to think twice before loading the boat.

A Whole Lot of Tesla

Plus, the ARK Innovation ETF will remain susceptible to volatility because of its very heavy weighting toward one asset: Tesla (NASDAQ:TSLA) stock. Believe it or not, 11.07% of the ARKK ETF is allocated toward Tesla stock.

Other major holdings of the fund include Roku (NASDAQ:ROKU) stock (8.71% of the fund’s portfolio weighing), Coinbase Global (NASDAQ:COIN) (7.14%), and Roblox (NYSE:RBLX) (6.83%). Therefore, a whopping 33.75% of Wood’s fund is committed to just four stocks.

That’s significant because diversification is an essential safety feature for ETFs. Since one-third of the ARK Innovation ETF is comprised of only four stocks, and more than one-tenth of the fund is allocated toward Tesla stock, then we can’t reasonably conclude that the ARKK ETF is broadly diversified.

Safety-focused investors could have major concerns about the ARK Innovation ETF’s holdings. Is CEO Elon Musk too distracted to properly run Tesla this year? If the Bitcoin (CRYPTO:BTC) price crashes 30%, 40%, or more, what would happen to Coinbase stock?

Along with all of that, safety-concerned investors might worry about the ARKK ETF’s valuation. Specifically, the fund has a trailing 12-month price-to-earnings (P/E) ratio of 32.53x as of March 25. That’s not outrageously high, but it may be higher than one would expect, especially considering the fund’s sharp price drop since 2021.

All in all, Wood’s fund certainly focuses on innovation but it appears to lack proper diversification. Since volatility has been the norm with the ARK Innovation ETF, it’s wise for safety seekers to keep their exposure to ARKK to a minimum if they choose to invest at all.

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