Call it a “fund of personality,” if you’d like. Some investors who hold Ark Investment Management’s ARK Innovation ETF (NYSEARCA: ARKK) are in the trade simply because they believe in the company’s CEO, Cathie Wood. The fund and its founder are both headline grabbers, but undoubtedly, not every shareholder is pleased with the ARKK ETF’s recent volatility.

The old saying that volatility brings opportunity may or may not apply here. After all, just because an asset’s price is down doesn’t necessarily mean it’s a bargain. Still, for investors who prefer stocks and companies with certain characteristics, it might be an opportune time to “get on board the ARKK,” so to speak.

Are you down with the blockchain?

First things first: if you’re going to hold the ARKK ETF, you’d better be a fan of the blockchain and cryptocurrency. Wood is an unabashed crypto super-believer, having suggested that Bitcoin (BTC-USD) will rally to $3.8 million.

Consequently, it makes sense that the ARKK ETF includes a number of blockchain-friendly components. Indeed, stock holdings in the fund’s top 10 by weighting include Coinbase Global (NASDAQ: COIN) and Block (NYSE: SQ) as well as Robinhood Markets (NASDAQ: HOOD), which facilitates the trade of both stocks and cryptocurrencies. Plus, there’s Roblox (NYSE: RBLX), which could be considered a metaverse company.

Apparently, Wood and Ark Investment Management really like Coinbase. COIN stock comprises 10% of the ARKK ETF’s holdings. When we add SQ and HOOD stocks to COIN, that’s more than 20% of the fund.

Of course, you don’t have to agree with Wood’s $3.8 million Bitcoin price prediction to own the ARKK ETF. It certainly helps, though, if you’re a blockchain bull on some level.

This means being able to handle a measure of volatility. To a certain extent, Coinbase stock follows the price moves of Bitcoin, and Bitcoin is a fast mover. Notably, COIN stock’s five-year monthly beta is 3.42, which basically means that the stock moves over three times as fast (in both directions, mind you) as the benchmark S&P 500 (SPX) index. And again, this stock represents 10% of the fund’s weighting.

Choosing momentum over value

You may have heard about Wood and Ark Investment Management buying Tesla (NASDAQ:TSLA) stock when it was down. Don’t get the wrong idea from this. Wood might sometimes be a dip buyer, but this doesn’t automatically make her a value investor.

By and large, the ARKK ETF’s top 10 holdings are momentum stocks, not value stocks. Take Tesla stock, for example. This is the fund’s second-biggest holding, at 8.5% of ARKK’s weighting.

TSLA stock has certainly dipped this year, so far. Yet, this doesn’t make the stock a bargain. Currently, Tesla’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio is 37.55. For reference, the sector median P/E ratio is 17.1.

Meanwhile, Coinbase, which has more weight in the ARKK ETF than Tesla, is the complete opposite of a bargain. Believe it or not, Coinbase’s P/E ratio is nearly 600, versus 10.66 for the sector median.

Wait — it gets worse. As of this writing, Square’s P/E ratio is 4,579.72. But then, if Bitcoin is going to $3.8 million, what difference does it make? We can all be blockchain millionaires if Wood’s thesis is correct.

The point here isn’t to mock Wood but to alert prospective investors that the ARKK ETF isn’t ideal for strongly value-focused folks. If momentum is your thing, perhaps you’ll be willing to overlook the sky-high valuations of some of the fund’s holdings.

The risks of risk-on assets

Even more than momentum (and, for that matter, more than “innovation”), I’d say that the common theme of the ARK Innovation ETF is risk-on. The fund’s constituent stocks will perform well when the market’s in a risk-on mood; when traders are feeling risk-averse, the ARKK ETF won’t likely fare well.

As you may have noticed, it’s risky to be risk-on. Inflation is trending back up. The Federal Reserve might end up keeping interest rates higher for longer than many stock traders expected. “Momo” (momentum) stocks have looked wobbly lately.

However, wobbling is par for the course if you’re going to hold the ARKK ETF. There will be big up moves and big down moves, and currently, the trend is to the downside. Are you feeling panicky?

If so, Wood’s fund probably isn’t right for you. However, if you’re a true-blue Bitcoin believer and can forgive triple- and quadruple-digit earnings multiples, then feel free to “board the ARKK” with a carefully considered share position.

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