ARKK - JEPI Vs. ARKK: Which ETF Is The Better Buy?

2023-04-05 10:43:36 ET

Summary

• JPMorgan Equity Premium Income ETF presently offers passive income investors an 11.7% dividend yield, paid monthly.
• ARK Innovation ETF offers investors a concentrated portfolio of high beta stocks and an aggressive investment strategy that could result in alpha if the market doesn’t turn south.
• I am long both funds but think that one of JEPI and ARKK currently has an advantage.

In this article, I will investigate which of the two following investment funds, depending on the market environment, offers investors the highest return potential. Thousands of investment vehicles are available to investors, including exchange-traded funds, mutual funds, and closed-end funds.

The JPMorgan Equity Premium Income ETF ( JEPI ) is a good choice for passive income investors because it provides a low-cost, diversified stock portfolio with an 11.7% dividend yield. Cathy Wood's flagship exchange-traded fund, the ARK Innovation ETF ( ARKK ) , on the other hand, provides investors with attractive total long-term return potential.

Despite the fact that ARKK does not pay dividends, owning the exchange-traded fund ("ETF") may make sense in certain situations.

Differences In Style And Performance

The significant performance difference between the JPMorgan Equity Premium Income ETF and the ARK Innovation ETF can be attributed to significant differences in style and fund composition.

The former is made up of a portfolio of high-quality stocks from the S&P 500 index that have a long history of paying out dividends to shareholders.

The latter is at the opposite end of the risk spectrum and is aggressively concentrated in a number of high-potential, high-beta stocks such as Tesla, Inc. ( TSLA ) , Zoom Video Communications, Inc. ( ZM ) , and Coinbase Global, Inc. ( COIN ) .

The reasons for ARKK's poor performance are well known: during the pandemic, the ETF invested heavily in high-priced tech stocks, riding the wave up before many of the fund's holdings corrected in price.

After years of being critical of the Ark Innovation ETF, I have recently become more bullish on the fund, believing that ARKK has a chance to rebound.

Buy JEPI If You Want To Park Money Or Hedge Against A Difficult Market

When should you invest in the JPMorgan Equity Premium Income ETF or the ARK Innovation ETF? The answer is in what you anticipate the market will do.

If you are concerned about short-term price volatility and a worsening bank crisis in the United States, the JEPI may be a good hedge because it pays a monthly distribution and the underlying portfolio is made up of high-quality S&P 500 stocks, which have less downside risk than ARKK's high beta stocks.

On the contrary, if the U.S. economy avoids a recession, the ARK Innovation ETF may be an appealing investment for investors who expect high beta stocks to perform well. With a strong labor market and ongoing rate hikes, economic fundamentals point to a re-rating of technology stocks.

While the Ark Innovation ETF does not pay a dividend, Cathy Wood's flagship fund has attractive long-term return potential due to its concentration in high-growth tech stocks.

For investors, the ARK Innovation ETF is clearly a high-risk, but also high-potential investment. The beta factor of the ETF, which measures security risk relative to the market, is 1.68, which means that ARKK moves 1.68% for every 1% move in the stock market. A beta factor of greater than one indicates high risk (higher risk than owning the market portfolio), so ARKK should be purchased only by investors who do not require recurring monthly income and have a high level of risk tolerance.

JEPI Has A Slight Cost Advantage

JPMorgan Equity Premium Income ETF charges investors a net expense ratio of 0.35% annually while the Ark Innovation ETF has a ((NET)) expense ratio of 0.75%.

Why Both JEPI And ARKK Could Decline In Value

Because of Cathy Wood's aggressive concentration strategy, the ARK Innovation ETF has underperformed significantly over the last two years. The top ten fund holdings account for 65% of the total investments in the ETF .

Both funds' NAVs would have to fall significantly for the bank crisis to worsen, which is clearly a possibility. In general, falling interest rates/inflation and slowing growth would be major issues for both ETFs, but I believe the JEPI would fare better due to a more diverse investment portfolio.

My Conclusion

The decision on which ETF to purchase is, as always, based on your expectations for future stock market performance.

I actually believe that the JEPI is an excellent investment option for passive income investors looking to park their money in a diversified, low-cost exchange-traded fund that provides access to a high-quality stock portfolio comprised of companies with long dividend track records.

The ARK Innovation ETF, on the other hand, will not appeal to investors with lower risk tolerance because the investment fund's strategy is very aggressive and the portfolio is primarily comprised of high beta stocks.

However, if the economy roars back in 2023 or 2024 and inflation falls, I can see a strong investment case for even high beta portfolios like the Ark Innovation ETF.

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