Which ETF is a Better Buy?

ARK Innovation ETF (ARKK) and Technology Select Sector SPDR Fund (XLK) are two prominent tech ETFs designed to capture the benefits of technological advancements and innovations across various industries. ARKK invests in companies that can profit from innovations such as artificial intelligence, automation, financial technology and cloud computing. XLK offers exposure to companies in the IT services, wireless telecommunication services, semiconductors and various other sectors.

Technology stocks have been the major beneficiaries of the COVID-19 pandemic. A rapid adoption of digital payments, proliferating  work-from-home arrangements and online shopping trends have accelerated the demand for products and services offered by the major technology companies.

While investors’ concerns about the overvaluation of the tech stocks amid the economy’s recovery has led to a  sell-off of tech stocks lately, the continuation of pandemic-driven trends given their benefits should allow tech stocks to continue  generating high returns for investors. Both ARKK and XLK are well positioned to take advantage of this prospective growth this year and beyond.

ARKK gained 118.8% over the year and XLK has returned 45%. In terms of past six-month performance, ARKK is the clear winner with 34.5% gains versus XLK’s 14.3%. But which of these ETFs is a better pick now? Let’s find out.

Investment Objective and Portfolio Structure

ARKK is an actively managed fund that invests in companies that  benefit from the development of new products, technological and  scientific research advancements, industrial innovation in energy, automation and manufacturing, the increased use of next generation internet and cloud computing, and technologies that make financial services more efficient. The ETF seeks long-term growth by offering exposure to domestic and  foreign equities that  fall under ARKK’s investment theme of disruptive innovation.

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XLK closely tracks the index of S&P 500 technology stocks and invests in market segments that include financial payment processors, telecommunication firms, semiconductors, while allocating its assets mainly to giant- and large-cap firms. The ETF provides exposure to companies from  across the technology sector, which makes it an ideal choice for investors looking for a broader tech exposure.

Expense Ratio, AUM and MSCI Rating

ARKK has an expense ratio of 0.75%, which is higher than its category average  0.53%. The ETF has a stable environmental, social and government outlook. It has a BBB MSCI Rating, which is based on a score of 4.78 out of 10. ARKK has approximately $21.54 billion in assets under management (AUM).

In comparison, XLK has an expense ratio of 0.12%, which is much lower than the category average  0.54%. The ETF has an MSCI ESG Fund Rating of BBB, which is based on a score of 5.29 out of 10. XLK has  approximately $36.01 billion in AUM.

Here XLK is in an advantageous position.

Top Holdings

ARKK’s major holdings include Tesla, Inc. (TSLA), Square, Inc. (SQ), Roku, Inc. (ROKU), and Teladoc Health, Inc. (TDOC).

In comparison,  XLK’s major holdings include Apple, Inc. (AAPL), Microsoft Corporation (MSFT), Visa Inc. (V), and Mastercard Incorporated (MA).

POWR Ratings

XLK has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. But  ARKK has an overall rating of C, which translates to Neutral.

XLK has a B for Trade Grade, Buy & Hold Grade, and Peer Grade. In contrast, ARKK has a D for Trade Grade and Peer Grade, and a C for Buy & Hold Grade.

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Of the 108 ETFs in the C-rated Technology Equities ETFs group, XLK is ranked #17 while ARKK is ranked #48.

The Winner

Both ARKK and XLK are good long-term investments considering their exposure to stocks with solid growth prospects this year and beyond. However, XLK appears to be a better buy based on the factors discussed here.

Our research shows that the odds of success increase if you bet on ETFs with an Overall POWR Rating of Buy or Strong Buy. If you’re looking for other top-rated stocks in the Technology Equities ETFs group, click here.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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XLK shares were trading at $130.65 per share on Tuesday afternoon, up $4.82 (+3.83%). Year-to-date, XLK has gained 0.48%, versus a 4.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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