QQQ vs. ARKK: ETF Comparison For Long-Term Investing

Just as there are numerous investment strategies, there are many exchange-traded funds (ETFs) for investors to choose from. Some ETFs are active, meaning they have investment professionals actively buying and selling stocks in the portfolio. Others are passive and follow indexes.

ARKK and QQQ are two of these ETFs, each with different management strategies, fees, and portfolios. Both ARKK and QQQ have different portfolio structures as well as different fees and historical performance. When investing in ETFs, it’s essential to understand these differences, and this article will elaborate.

The ARKK ETF, also called the Ark Innovation ETF, is an actively managed fund, meaning investors decide whether to buy and sell stocks in a portfolio based on market timing. In the case of ARKK, investors primarily target stocks within the technology sector and tech companies that are poised for “disruptive innovation.” In this case, disruptive innovation refers to stocks that will change the paradigm of the industry in which they operate.

Some of the sectors ARKK focuses on are DNA technologies, genomics, automation, robotics, energy storage, artificial intelligence, next generation internet, and fintech. As these industries are on the cutting edge of human civilization, there are massive opportunities for growth. Because it is actively managed, the investment board uses their own data analysis to choose which companies they feel have incredible upside potential and thus maximize returns.

ARKK currently (as of April 30, 2022) has net assets of $8.8 billion under management. Although anything in the billions sounds like a large number, in the context of ETFs, it is on the smaller size.

Furthermore, their portfolio is relatively smaller than most ETFs. ARKK currently has 36 holdings in its fund portfolio. The fund features headline innovative companies, such as Tesla, which is tracked in many major ETFs. However, they also choose companies such as Roku and Teladoc Health. Although these companies are not as well known, ARKK sees them as having tremendous upside potential with the ability to disrupt their industries.

Due to the fact that it’s actively managed, ARKK has a higher expense ratio than most ETFs. The average expense ratio or fees charged for ETFs is 0.44%. ARKK’s expense ratio is 0.75%. This means that an average ETF will charge you $4.40 for every $1,000 you invest, and ARKK will charge $7.50 for every $1,000 you invest. Considering ARKK is actively managed, it makes sense that they would charge more than the average ETF.

Unlike ARKK, the Invesco QQQ trust is a passively managed fund. This means that there are no investment managers actively buying and selling stocks on a regular basis. Rather, they link themselves to the Nasdaq 100.

Nasdaq 100 is composed of equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. The fund merely performs with the aggregate performance of the Nasdaq over time. Their holdings include many more well-known, blue-chip companies such as Microsoft Corp, Apple Inc, and Facebook Inc.

QQQ has a much larger portfolio of assets than ARKK, with $169.5 billion of assets under management (AUM). Their holdings also consist of 103 stocks and securities. It’s typical for exchange-traded funds that are passively managed and track indexes to have more AUM than actively managed funds. Usually, a larger amount of AUM signifies that there is trust in the company as well.

Because the fund is passively managed, the expense ratio is below average for that of an ETF. The expense ratio for QQQ is 0.20%, which is less than half of the average expense ratio for an ETF. This means that for every $1,000 you invest in QQQ, you are charged $2 rather than the $4.40 per $1,000 you pay in an industry average ETF.

Again, the benefit of ETFs that track an index is that they are typically considerably lower in fees. When looking at ARKK vs. QQQ, the fees can definitely be a factor.

As you can see, the two ETFs have a great deal of differences between them, including how they performed in previous years.

ARKK is a relatively new ETF and was only released in 2014. However, it has shown very strong returns of 19% per year. This is impressive when looking at the average of the S&P 500 over the last five years, which stood at 13.95%. However, ARKK can be volatile, particularly when analyzing the effect of the pandemic over that period of time.

For instance, ARKK gained a whopping 152% in 2020. This is probably related to both the rise of tech stocks during the pandemic as well as the extremely low-interest rates being perpetuated by the federal government. In 2021 however, the fund was at a -14% return at year’s end. This insinuates that ARKK’s large returns and losses were probably directly correlated to the pandemic.

In the case of the QQQ, this fund has been around longer, and thus it has more of a history to track. It was released in 1999, and since its inception, it has posted a 9.55% return.

That’s not bad considering the average annual return of the S&P 500 (from 1959 to 2021) was about 10.75% and the average stock market return between 2010 and 2020 was around 7.45%. So, it’s safe to assume that passively managed ETFs will be in line with the market but can fluctuate to some degree.

At the end of 2021, QQQ was up 23.97%, whereas ARKK was down 14%. However, when looking at how both funds have performed over time, ARKK has done relatively better. QQQ’s 5-year growth rate was around 235%, whereas ARKK’s growth rate stands at 414.5%.

Looking for an ETF that gives you the best return with the smallest risk? Consider hiring an investment advisor to help you select it.

When deciding between an actively managed and passively managed ETF, fees can make a difference. Although ETFs are famous for their low fees, they can make a difference over time. Take the example below, which compares the fees and estimates of costs for both.

After five years, you would have paid $1,300 in fees with QQQ’s 0.20% expense ratio, whereas with ARKK’s expense ratio of 0.75%, you would pay $4,875 in fees. So effectively, you would pay four times the money in fees by buying an ARKK vs. QQQ.

In this example, we take an initial investment and its value each year after five years. With an ETF, you are charged annually on the amount you have in the fund. In the example, the investor contributes $100,000, and by the end of year five, that investment is worth $150,000.

There’s no one right answer for this question since the “better” investment depends primarily on your individual investment strategy.

This includes the level of volatility you feel comfortable with. If you are an investor who doesn’t mind a bit of volatility over time as long as the returns are good in the long run, then an actively managed, more volatile ETF like ARKK might be right for you. However, if you prefer less volatility, a passively managed index-linked fund like QQQ might be up your alley. Regardless of your choice, keep in mind that both ETFs are equity funds that carry significant risk.

Like QQQ, VOO is an exchange-traded fund passively managed by Vanguard. ARKK is a different type of ETF, so you can’t really compare them head to head. VOO may be best for investors looking for a low-cost passive ETF that tracks the S&5 500. However, the ARKK might be a better fit for someone looking for a higher return and is comfortable with additional risk.

Based on performance, ARKK should be considered a good long-term investment. However, this is a different question than if it is a good long-term investment for you. That depends on your tolerance for risk and time horizon.

ARKK is at higher risk than QQQ because of its volatility. This is related to the fact that it concentrates its holdings on cutting-edge companies that carry more risk, especially when compared to the large and most established companies in the Nasdaq 100 and QQQ.

ARKK is made up of a basket of stocks related to disruptive innovation, or companies that are at the forefront of change in their industry. This includes many tech companies, even those focused on DNA technologies and artificial intelligence.