An S&P 500 ETF has comparably good long-term results with much fewer wild swings to go with it.
After a 2022 that saw its stock price drop 67%, Ark Invest's flagship fund, the Ark Innovation ETF (ARKK 1.73%), bounced back in 2023 and finished the year up 68%. It was a much-needed boost for the exchange-traded fund (ETF) that shot up in popularity in 2020 and 2021 before losing steam.
Considering the momentum the Ark Innovation ETF is riding into 2024, it's no surprise that investors are thinking about giving it another chance. However, there's an ETF I like even more for the new year: the Vanguard S&P 500 ETF (VOO 0.53%).
I trust the companies leading the S&P 500 more than the ones leading Ark's ETF
The Ark Innovation ETF focuses on companies setting out to disrupt their respective industries, particularly those in fintech, artificial intelligence (AI), automation and robotics, DNA technologies, and similar fields. The Vanguard S&P 500 mirrors the S&P 500 index, which tracks the 500 largest stocks traded on the U.S. stock market.
The Ark Innovation ETF's theme is "disruptive innovation." The Vanguard S&P 500 doesn't have an official theme, but if it did, it'd be something along the lines of "large and in charge" given the industry-leading companies it contains. One of the reasons I like the Vanguard S&P 500 ETF more going into 2024 is because I have more faith in its top holdings:
| Ark Innovation ETF | Vanguard S&P 500 ETF |
|---|---|
| Coinbase Global (11.10%) | Microsoft (7.31%) |
| Tesla (7.43%) | Apple (7.24%) |
| UiPath (7.19%) | Amazon (3.44%) |
| Roku (6.92%) | Nvidia (3.00%) |
| Zoom Video Communications (6.83%) | Alphabet (2.04%) |
Data source: ETF fact sheets. ARKK as of Jan. 1, 2024. VOO as of Nov. 20, 2023. Numbers represent weighting in each fund.
The Ark Innovation ETF's top five holdings make up almost 40% of the fund, so as they go, so does it. The 505-stock Vanguard S&P 500 ETF is fairly top-heavy as well with 23% concentrated in the top five stocks, but I trust the track record of those companies a lot more.
When times are good for the Ark Innovation ETF's top holdings, the fund's performance is great. When times are bad, it can get really ugly. Here's how much each stock is down from its peak over the past three years:
Data by YCharts.
No stock is immune to volatility, but the Ark Innovation ETF's top holdings have experienced wild swings over the past few years, and there's nothing to convince me it won't continue. On the other hand, I trust the S&P 500's most important companies to provide much more stable returns.
Stability doesn't have to mean lower returns
Growth stocks (which the Ark Innovation ETF focuses on) are known for being volatile, but it's usually a trade-off investors make for the promise of higher potential returns. However, the Vanguard S&P 500 ETF has shown you can have stability and still produce solid long-term results.
Since the Ark Innovation ETF's Oct. 2014 inception, the Vanguard S&P ETF has delivered a higher total return.
Data by YCharts.
Sometimes, slow and steady wins the race, and that's been the case up to this point for these two investments.
Past returns don't guarantee future results, and there's no way to predict how each ETF will perform from here, but the Vanguard S&P 500 ETF's comparable long-term result with much less second-guessing makes it the superior option for most investors.
You can't ignore the cost difference
ETF expense ratios don't get as much attention as they should, but they can have a considerable effect on investors' returns over time. Since the Ark Innovation ETF is actively managed, its expense ratio is higher than what you'll see with passively-managed ETFs like the Vanguard S&P 500 ETF.
The Ark Innovation ETF's expense ratio is 0.75% compared to the Vanguard S&P 500 ETF's 0.03%. To see the difference this could make, let's assume you invest $1,000 monthly into the two ETFs and average 10% annual returns over 20 years. Here's how your investments would stack up in that time.
| Expense Ratio | Ending Value | Amount Paid in Fees |
|---|---|---|
| 0.03% | $685,000 | $2,300 |
| 0.75% | $631,400 | $55,900 |
Source: Author calculations. Values rounded to the nearest hundred.
Less than a 1% difference in expense ratios amounted to over $53,000 more in fees paid over 20 years. That money could go a long way at any time but especially in someone's later years as they near retirement.
An S&P 500 ETF offers the trifecta of solid long-term growth with diversified holdings at a low cost.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stefon Walters has positions in Apple, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Coinbase Global, Microsoft, Nvidia, Roku, Tesla, UiPath, Vanguard S&P 500 ETF, and Zoom Video Communications. The Motley Fool has a disclosure policy.
