Things have been looking up for Cathie Wood’s flagship Ark Innovation ETF (NYSEARCA:ARKK) since bouncing off last year’s August trough. Though the ARKK has been putting up a good fight with the Nasdaq 100-following Invesco QQQ Trust (NASDAQ:QQQ) in the past year, gaining 27% versus around 24% for the QQQ. Indeed, the Nasdaq 100 is the choppier but more rewarding (at least in recent years) alternative for more growth-minded index investors.

The ARKK takes volatility a step further but without necessarily leveling up the returns. The big question for Ark is whether it can make up for the wilder swings with a more considerable upside versus the Q’s as new tech trends hit the ground running (think genomics and AI). Only time will tell if the rockier road ahead is the one met with greater rewards.

I think it’s important to monitor Wood’s recent buys and sells to get a better understanding of the themes she’s looking to invest in, as well as where she sees relative value in a high-growth corner of the market that’s known to accompany valuation metrics far above that of the market averages. Indeed, Wood is likely on the hunt for high-multiple stocks with a realistic trajectory to grow into their multiples.

With ARKK sinking close to 6% last Friday in what was an ugly day on Wall Street, with the S&P 500 and Nasdaq 100 plunging 1.7% and 2.1%, respectively, it seems like the ARKK could be destined for a year of amplified volatility (1.97 beta) and uncertainty.

ARKK has a heavier concentration on specific themes versus the QQQ

Though the ARKK’s recent performance is nothing to write home about, I wouldn’t count Wood and her team out of the game just yet, especially if your personal investment style aligns with hers. Indeed, if you’re a younger investor who’s tech-savvy, you’ll probably be more sold on Cathie Wood’s funds.

Whether you’re a believer in Bitcoin, AI-powered genomics, the robotaxi revolution, the metaverse, or other disruptive innovations, odds are you’ll be intrigued with the stocks Wood sets her sights on at any given time. Perhaps the biggest reason to give Wood the benefit of the doubt is her willingness to buy on dips and take profit after surges. She’s acted as a true contrarian amid the recent slump in high-multiple disruptive tech stocks.

While time will tell if she’s right to make the moves she has, I do think she’s a great captain of a ship sailing through waters that can be rather hard to navigate. Indeed, valuing disruptive innovators requires a different set of tools than the ones used to evaluate market stalwarts and other predictable firms that Warren Buffett tends to be a bigger fan of. And while Buffett’s investing style will make your portfolio less of a stomach-churner, your returns potential is likelier to be closer to that of market return.

If you want to beat the market, you’ll need to take that extra risk, and, of late, the risks have led to drastic underperformance relative to the market indices over these past five years. Where some see a perennial underperformer, I see potential value.

Cathie Wood’s had some great picks. However, they haven’t been enough to raise the tides.

Though it’ll take more years of better performance to win me over to the Ark line of funds, I do think she has a good shot of delivering surprises if the tech trends she’s put big money on end up delivering. Additionally, as the Magnificent Seven names run out of steam and give way to the smaller, less-loved tech names, ARKK could have more wind at its back.

I’m inclined to view ARKK as a way to broaden one’s horizons on tech beyond the Mag Seven names. With the Q’s or even the S&P 500, you’re already getting a ton of mega-cap tech exposure, with less weighting towards the names that could rise up from out of left field as they pole-vault higher in the market-cap rankings.

Wood’s bet on Palantir (NASDAQ:PLTR) has really stood out from the pack in recent quarters. Over time, picking just a few winners like Palantir could be enough to move the needle high enough such that one’s many loser picks are more than forgivable.

The bottom line

Just as the QQQ can be a nice growth amplifier for an S&P 500-heavy portfolio, the ARKK has its place in young growth investors’ portfolios.

Whether you’re looking to concentrate bets on specific themes (think of Ark’s many thematic ETFs) or if you’re looking to bet on all the themes that extend far beyond the Mag Seven, the Ark funds stand out as compelling in such an exciting time for tech.

Wood has had some glimmers of brilliance in recent quarters. But the big question is whether the macroeconomic winds will work with or against her funds in the coming years. Indeed, higher interest rates are like gravity for stock multiples. For high-multiple innovation stocks, the effects of such gravity could be even more pronounced.

So, if you’re looking to bet on ARKK, fasten your seatbelt and have a game plan for if shares continue to drag versus the QQQ. If interest rates trend lower and non-Mag Seven tech names do more heavy lifting, ARKK may have what it takes to get back on top. For now, I’m inclined to view disruptive innovation as a great relative value for investors with the patience and risk tolerance to stay aboard the ARKK.

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