The combination of a middling Process Pillar rating and a Below Average People Pillar rating limit  ARK Genomic Revolution ETF to a Morningstar Medalist Rating of Neutral.  The portfolio maintains a sizable cost advantage over competitors, priced within the second-cheapest fee quintile among peers.  

 The strategy’s management team earns a Below Average People Pillar rating. The strategy gets an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a considerable overweight position in liquidity exposure and volatility exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. The strategy's parent organization earns the firm a Below Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

CRISPR Therapeutics

Twist Bioscience Corp

Exact Sciences

Recursion Pharmaceuticals

Schrodinger 

Ionis Pharma

Accolade

Intellia Therapeutics

Beam Therapeutics

Arcturus Therapeutics

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category index on a risk-adjusted basis over the long term. ARK Genomic Revolution ETF earns an Average Process Pillar rating. 

The leading factor in the rating is the firm's five-year retention rate of 100% over the period. The stability of the management team also supports the process. Specifically, the fund has not seen a manager change in the last nine years. Lastly, the process is limited by the fund's unremarkable long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category index, which suggests that the process has struggled over that period.

 This strategy skews toward smaller, more growth-oriented companies compared with its average peer in the Health Morningstar Category. Examining additional factor exposure, the fund has held stocks with higher trading volumes compared to Morningstar Category Peers in the past few years. This gives the managers more flexibility during bear markets to sell without adversely affecting prices. In recent months, the strategy was more exposed to the Liquidity factor compared with its Morningstar Category peers as well. This strategy also has had an overweight bias to the volatility factor over these years, meaning it has owned companies that have a higher historical standard deviation of returns. Such exposure tends to pay off when markets are hot and to be costly when they are not. Compared with category peers, the strategy also had more exposure to the Volatility factor in the most recent month. In addition, the portfolio has tended to underweight yield, as shown in its lower exposure to companies that pay dividends or buy back shares than peers over these years. Returning capital to shareholders often is not the highest priority of such businesses. The shares of such companies can deliver strong returns if they fulfill their growth projections, but they also carry more risk. In recent months, the strategy also had less Yield factor exposure than its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio has allocations in its top two sectors, technology and financial services, that are similar to the category. The sectors with low exposure compared to category peers are healthcare and basic materials; however, the allocations are similar to the category. The portfolio is composed of 42 holdings and is quite concentrated. In particular, 49.9% of the strategy's assets are housed within the top 10 holdings, compared to the category average of 38.7%. And in closing, in terms of portfolio turnover, on a year-over-year basis, 28% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

Average

Process

With only one listed portfolio manager, ARK Genomic Revolution ETF leaves itself vulnerable to key-person risk. The manager has not yet proven themself effective at running the strategy, leading to a Below Average People Pillar rating. This is concerning as a strategy's team size and management stability contribute significantly toward the People Pillar rating.  Catherine D. Wood brings over 23 years of portfolio management experience to the table. However, the risk-adjusted performance of the strategies they manage has been weak, averaging a 1.2-star Morningstar Rating. Isolating the analysis to the fund at hand, Catherine Wood has delivered inferior performance, lagging both the category benchmark and average peer over the past nine-year period. Finally, Catherine Wood has invested over $1 million in the fund, showing an effort to build a proper incentive structure and align interests with fundholders.

 Note: The People Pillar rating is indirectly assigned by an analyst. The longest-tenured manager of the fund also manages a different product rated by an analyst. Their analyst-assigned People Pillar rating is combined here with the People scores (algorithmic or analyst-assigned) for the fund’s other managers on a tenure-weighted basis.

Below Average

People

ARK Investment Management is a thematic-investing specialist that has done little to mitigate the significant risks borne by its clients. It earns a downgrade of its Parent rating to Below Average from Average.

ARK's main draw is its founder, chief executive officer, and sole portfolio manager Cathie Wood, who since launching the firm in 2014 has presided over its tremendous growth in recent years while establishing a broad media presence and enthusiastic following. Despite horrendous results across its lineup of six actively managed exchange-traded funds over the past 12 months, the firm has shown remarkable asset retention but little inclination to prevent future implosions. It had roughly $55 billion in assets under management as of March 2022.

The firm's risk-management resources are below industry standards. Its assets are mostly (if not entirely) tied to nondiversified portfolios that make huge industry bets, embrace stocks with high volatility, and are highly correlated to one another. The firm has no risk-management professionals to either define risk tolerance, monitor exposures, or foresee possible downsides.

It has in place a poor succession plan for 66-year-old Wood, the firm's majority owner and lone portfolio manager. Her would-be successor's 15 years of industry experience include none as a portfolio manager. Dovetailing with that key-person risk is the firm's inability to develop and retain talent on the analyst team.

The firm has been shareholder-friendly in some ways. Its ETFs are cost competitive relative to actively managed rivals, and Wood personally invests in them, which helps align interests.
But overall, the firm's stewardship falls short. A capability to manage its myriad risks and a culture that fosters career growth within the research team would do more.

Parent

ARK Genomic Revolution Multi-Sector ETF

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