Are You Underexposed To Innovation Going Into 2025?

By Thomas Hartmann-Boyce, CFA, Dan White, CFA, Grant Banko

Introduction

A fundamental principle of successful investing, diversification spreads investments across different asset classes and sectors to reduce the impact of any single security or industry's performance on one’s overall portfolio. While no investment is immune to market fluctuations, diversification acts as a safeguard against volatility.

Heading into 2025, we believe many investors could be underexposed to the full potential of innovation. Investors who recognize the potential of disruptive innovation and understand how to incorporate it into a diversified investment strategy may be better positioned to generate long-term value while simultaneously mitigating risk. Importantly, the study below illustrates four key principles:

A 5% allocation to innovation within a broad equity portfolio has historically added to excess returns within the Model portfolios.
For a more aggressive 15% allocation to innovation, annualized excess return peaked at 8.8% and troughed at -0.9%, representing asymmetric upside.
Innovation’s volatility can be muted by incorporating it into a diversified portfolio.
Despite the broadening out that occurred in the second half of 2024, investors still could be underexposed to innovation relative to targets.

Adding Innovation to Portfolios: An Illustrative Case Study

To support investors in their efforts to incorporate innovation within a well-diversified portfolio, in this study we illustrate the principles of creating a broad equity portfolio. By gradually increasing innovation exposure in 5% increments while maintaining a rebalancing band of 2.5%,¹ we present a diversification strategy that allocates to innovation while remaining on track with its target weight. In our view, this disciplined approach allows for adjustments when necessary and helps to maintain the desired balance within the portfolio.

The charts below show the structural dynamics of four model portfolios (inception October 30, 2014)—a Reference Portfolio lacking exposure to innovation, and three with increasing allocations to innovation. The Reference Portfolio allocations were designed as a simplified global equity benchmark, giving readers a clear basis to evaluate portfolios that incorporate innovation (60% domestic equity, 30% international developed markets equity, and 10% emerging markets equity), and the index ETFs were selected because they closely track the target regional allocations. Each of the other model portfolios represents an incremental allocation to innovation stocks, as represented by the ARK Innovation ETF, with the remaining balance prorated among the initial asset classes based on the 60%-30%-10% allocation. Lastly, while many clients rebalance portfolios temporally (e.g., on a quarterly basis), we know that the market moves on its own calendar. For that reason, many clients find that incorporating rebalancing bands is a fruitful method for harnessing volatility.

Parts of a Global Equity Model Portfolio

As of December 31, 2024	3 Months	YTD	1 Year*	3 Years*	5 Years*	10 Years*	Since Inception*
Representation: US Market
Net Returns Since Inception (Jan. 23, 2004)
ITOT NAV	2.68%	23.82%	23.82%	7.91%	13.76%	12.52%	10.05%
ITOT Market Price	2.75%	23.80%	23.80%	7.93%	13.77%	12.52%	10.07%
Representation: International Developed Market (Ex US)
Net Returns Since Inception (Aug. 17, 2001)
EFA NAV	-8.45%	3.43%	3.43%	1.54%	4.67%	5.14%	5.25%
EFA Market Price	-8.36%	3.51%	3.51%	1.63%	4.70%	5.21%	5.29%
Representation: Emerging Markets
Net Returns Since Inception (Apr. 11, 2003)
EEM NAV	-6.91%	6.94%	6.94%	-2.55%	0.93%	2.94%	8.29%
EEM Market Price	-7.27%	6.50%	6.50%	-2.66%	0.79%	2.88%	8.34%
Representation: Innovation
Net Returns Since Inception (Oct. 31, 2014)
ARKK NAV	19.45%	8.36%	8.36%	-15.64%	3.05%	11.99%	11.85%
ARKK Market Price	19.44%	8.40%	8.40%	-15.65%	3.06%	11.98%	11.85%

*Annualized. Source: ARK Investment Management LLC, 2025, based on data from Bloomberg as of December 31, 2024. Note: Domestic Equity: iShares Core S&P Total US Stock Market ETF (ITOT; Expense Ratio: 0.03%); International Equity (Ex US & Canada): iShares MSCI EAFE ETF (EFA; Expense Ratio: 0.32%); Emerging Markets: iShares MSCI Emerging Markets ETF (EEM; Expense Ratio: 0.70%); Innovation: ARK Innovation ETF (ARKK; Expense Ratio: 0.75%, Inception Oct. 30, 2014).

For informational purposes only and should not be considered investment advice, or a recommendation to buy, sell or hold any particular security. Past performance does not guarantee future results. The Global Equity Portfolio scenarios shown are hypothetical and based on model portfolios constructed by ARK and form the basis of the hypothetical performance calculations shown on the following slides. Each asset class is represented by an ETF as described below.

The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal will fluctuate so that an investor's shares when redeemed may be worth more or less than the original cost. For the Fund’s most recent month end performance, please visit www.ark-funds.com or call 212.426.7040. Returns for less than one year are not annualized. As stated in the ARK ETFs' current prospectuses, the expense ratio for ARKK is 0.75%.

Extraordinary performance is attributable in part due to unusually favorable market conditions and may not be repeated or consistently achieved in the future.

For the most recent month end performance for ITOT, EEM, and EFA visit www.ishares.com or call 1-800-474-2737

Additional information about fees and expense levels can be found in the ARK ETFs' prospectuses. Net asset value (“NAV”) returns are based on the dollar value of a single share of an ARK ETF, calculated using the value of the underlying assets of the ARK ETF minus its liabilities, divided by the number of shares outstanding. The NAV is typically calculated at 4:00 pm Eastern time. Market returns are based on the trade price at which shares are bought and sold on the exchange using the last share trade. Market performance does not represent the returns you would receive if you traded shares at other times. Total Return reflects reinvestment of distributions on ex-date for NAV returns and payment date for Market Price returns. The market price of ARK ETF shares may differ significantly from their NAV during periods of market volatility. ARK's actively managed ETFs are benchmark agnostic. Index performance provided as a general market indicator.

A Positive Impact on Excess Returns

Next, we analyze the investment impact of adding a dedicated innovation sleeve to a broad portfolio, based on the ten-year track record of ARK’s flagship strategy, the ARK Innovation ETF (ARKK). In our view, rolling returns provide a reliable objective measurement because they smooth out endpoint sensitivity and incorporate a five-year return window that reflects ARK’s stated investment horizon.

As we analyze the rolling excess returns over five-year periods relative to the provided reference portfolio, we discover something fascinating: a 5% allocation to innovation enables the portfolio to outperform the Reference Portfolio every five-year period from October 30, 2019, through December 31, 2024, as shown below. In other words, including portfolio exposure to innovative companies generated significant excess portfolio returns over time, reinforcing the importance of embracing innovation as part of an investment strategy and incorporating a prudent rebalancing strategy.

Source: ARK Investment Management LLC, 2025, based on data from Bloomberg as of December 31, 2024. Note: Domestic Equity: iShares Core S&P Total US Stock Market ETF (ITOT; Expense Ratio: 0.03%); International Equity (Ex US & Canada): iShares MSCI EAFE ETF (EFA; Expense Ratio: 0.32%); Emerging Markets: iShares MSCI Emerging Markets ETF (EEM; Expense Ratio: 0.70%); Innovation: ARK Innovation ETF (ARKK; Expense Ratio: 0.75%, Inception Oct. 30, 2014).

For informational purposes only and should not be considered investment advice, or a recommendation to buy, sell or hold any particular security. Past performance does not guarantee future results. Data presented is unreconciled and from a third-party system. hypothetical model portfolios performance returns presented: 1) are not actual portfolios, 2) are being provided for illustrative purposes only, 3) do not represent the results of actual trading, 4) were achieved by means of the retroactive application of the model (see Disclosure at the end) designed with the benefit of hindsight, 5) involves an analytical model (See Disclosure in the back) which uses historical financial data, 6) should not be used as the basis for making an investment decision, 7) are NOT intended to illustrate investment results that were actually achieved or could have been achieved by any of our clients, 8) are comprised of what we believe are the most appropriate securities making up the model portfolios, 9) do not account for typical fees and expenses incurred by our clients, 10) assumes investment in the model portfolios each underlying fund's expense ratio, and 11) do not reflect the impact that material economic and market factors may have had on investment decisions that would have been in actual portfolios being managed at the time and do not involve market risk.

Translating the graph above to the historical probability of outperforming the Reference Portfolio across the 63 points of observation since the inception of the strategy, the portfolio with a 5% allocation to innovation outperformed 100% of the time, while a 10% allocation outperformed 76% of the time, and a 15% allocation outperformed 71% of the time. As shown in the chart above, however, the 15% Innovation portfolio’s annualized excess return peaked at 8.8% relative to the Reference Portfolio, while the maximum annualized loss relative to the Reference Portfolio troughed at just -0.9%. In other words, this case study underscores how best-practice rebalancing brings asymmetric potential for upside returns.

Minimal Impact on Portfolio Risk

From a risk perspective, even during one of the largest drawdowns in the history of growth stocks, the portfolio incorporating an Innovation Strategy experienced only a modest uptick in volatility between February 2021 through December 2022. Importantly, the delta between the Innovation and Reference portfolios did not widen, as shown below. In other words, because of the diversification benefits of ARK’s strategy, a high tracking error to the rest of the portfolio, and the prudence of structured rebalancing to mitigate market swings, the portfolios incorporating innovation did not experience a disproportionate increase in excess volatility.

For informational purposes only and should not be considered investment advice, or a recommendation to buy, sell or hold any particular security. Past performance does not guarantee future results. The Global Equity Portfolio scenarios shown are hypothetical and based on model portfolios constructed by ARK and form the basis of the hypothetical performance calculations shown on the following slides. Each asset class is represented by an ETF as described below.

The Importance of Rebalancing

Maintaining a diversified portfolio with exposure to innovation requires regular rebalancing. Given the heightened volatility often seen in technology-driven stocks, rebalancing allows investors to realign their allocations and keep them in line with predetermined targets. This disciplined approach protects against excessive overweighting or underweighting within the innovation sector and helps to manage risk effectively.

Given the upside performance of innovation since ARKK’s inception, a rebalancing strategy could trigger more trims to innovation than to top-ups—ultimately bringing the drifted weight of innovation back down to the fund’s target level. We believe the portfolio with a 5% innovation allocation, shown below, exemplifies that strategy.

For informational purposes only and should not be considered investment advice, or a recommendation to buy, sell or hold any particular security. Past performance does not guarantee future results. The Global Equity Portfolio scenarios shown are hypothetical and based on model portfolios constructed by ARK and form the basis of the hypothetical performance calculations shown on the following slides. Each asset class is represented by an ETF as described below.

That said, in the context of innovation’s underperformance relative to the broader market during the first half of 2024, this rebalancing strategy for the 5% innovation portfolio would not call for a trim at the end of calendar year 2024, as the allocation to innovation sits at 3.8%. In fact, that weighting falls below the target of 5% in this scenario and would lean more toward a top-up. In other words, this particular rebalancing strategy implies that we are in the early stages of a risk-on environment for innovation. Importantly, some investors have not yet allocated to innovation at all—a massive gap in exposure, we believe, going into 2025.

For informational purposes only and should not be considered investment advice, or a recommendation to buy, sell or hold any particular security. Past performance does not guarantee future results. The Global Equity Portfolio scenarios shown are hypothetical and based on model portfolios constructed by ARK and form the basis of the hypothetical performance calculations shown on the following slides. Each asset class is represented by an ETF as described below.

Conclusion: Opportunities for Allocating to Innovation

For investors seeking targeted exposure to disruptive innovation, we believe alternative strategies should be considered. ARK offers six actively managed exchange-traded funds (ETFs) focused on the five key innovation platforms that our research suggests will have the most valuable transformative impacts.

ARK Innovation ETF (ARKK) seeks to capitalize on what we believe are the most promising opportunities in AI, robotics, energy storage, multiomics, and blockchain technology that are driving the next wave of innovation across industries.
ARK Next Generation Internet ETF (ARKW) targets companies that are revolutionizing the internet through advancements in AI, blockchain technology, and cloud computing. ARKW also provides exposure to the rapidly evolving cryptocurrency ecosystem.
ARK Autonomous Technology & Robotics ETF (ARKQ) targets companies at the forefront of automation, robotics, and transportation that are driving the next generation of intelligent systems.
ARK Genomic Revolution ETF (ARKG) focuses on companies poised to benefit significantly from advancements in genomics by leveraging cutting-edge technological and scientific developments to extend and enhance the quality of human and other life.
ARK Fintech Innovation ETF (ARKF) targets companies that are transforming the financial industry through cutting-edge technologies that are driving the future of finance by reshaping how financial institutions assess risk, engage with customers, and streamline transactions.
ARK Space Exploration & Innovation ETF (ARKX) focuses on the rapidly evolving space exploration sector, including orbital and sub-orbital aerospace, their enabling technologies, and the industries benefiting from those advancements. This investment platform includes sectors such as agriculture, internet access, GPS, construction, and imaging, all of which are being revolutionized by space innovation.

Thanks to ARK’s highly active investment approach, all six of ARK’s actively managed ETFs are well-differentiated relative to common benchmarks, currently with an active share³ above 80% relative to the S&P 500, MSCI World, and NASDAQ 100, as of December 31, 2024.

We encourage investors to work with a chosen financial professional to assess their asset allocation strategies and explore possibilities for diversifying and benefiting from a strategy that incorporates innovation.

Important Information

Investors should carefully consider the investment objectives and risks as well as charges and expenses of an ARK Fund before investing. This and other information are contained in the ARK ETFs’ prospectuses and summary prospectuses, which may be obtained by visiting www.ark-funds.com. The prospectus and summary prospectus should be read carefully before investing.

The S&P 500® Index is a widely recognized capitalization-weighted index that measures the performance of the large-capitalization sector of the U.S. stock market. The MSCI World Index represents large and mid-cap equity performance across 23 developed markets countries. The NASDAQ-100 Index is a stock market index that includes 100 of the largest, most actively traded, non-financial companies that are listed on the Nasdaq Stock Market. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. You cannot invest directly in an index and securities in an ETF will not match those in an index. The active ETFs are benchmark agnostic and corresponding portfolios may have significant non-correlation to any index. Index returns are generally provided as an overall market indicator.

An investment in an ARK Fund is subject to risks and you can lose money on your investment in an ARK Fund. There can be no assurance that the ARK Funds will achieve their investment objectives. The ARK Funds’ portfolios are more volatile than broad market averages. The ARK Funds also have specific risks, which are described below. More detailed information regarding these risks can be found in the ARK Funds’ prospectuses.

The principal risks of investing in the ARK Funds include:

Disruptive Innovation Risk. Companies that ARK believes are capitalizing on disruptive innovation and developing technologies to displace older technologies or create new markets may not in fact do so. Companies that initially develop a novel technology may not be able to capitalize on the technology. Companies that develop disruptive technologies may face political or legal attacks from competitors, industry groups or local and national governments. These companies may also be exposed to risks applicable to sectors other than the disruptive innovation theme for which they are chosen, and the securities issued by these companies may underperform the securities of other companies that are primarily focused on a particular theme.

Equity Securities Risk. The value of the equity securities the ARK Funds hold may fall due to general market and economic conditions. Foreign Securities Risk. Investments in the securities of foreign issuers involve risks beyond those associated with investments in U.S. securities. Health Care Sector Risk. The health care sector may be affected by government regulations and government health care programs. Consumer Discretionary Risk. Companies in this sector may be adversely impacted by changes in domestic/international economies, exchange/interest rates, social trends and consumer preferences. Industrials Sector Risk. Companies in the industrials sector may be adversely affected by changes in government regulation, world events, economic conditions, environmental damages, product liability claims and exchange rates. Information Technology Sector Risk. Information technology companies face intense competition, both domestically and internationally, which may have an adverse effect on profit margins.

Financial Technology Risk. Companies that are developing financial technologies that seek to disrupt or displace established financial institutions generally face competition from much larger and more established firms. Fintech Innovation Companies may not be able to capitalize on their disruptive technologies if they face political and/or legal attacks from competitors, industry groups or local and national governments. Blockchain technology is new and many of its uses may be untested. Blockchain and Digital commodities and their associated platforms are largely unregulated, and the regulatory environment is rapidly evolving. As a result, companies engaged in such blockchain activities may be exposed to adverse regulatory action, fraudulent activity or even failure. Communications Sector Risk. Companies is this sector may be adversely affected by potential obsolescence of products/services, pricing competition, research and development costs, substantial capital requirements and government regulation.

Cryptocurrency Risk. Cryptocurrency (notably, bitcoin), often referred to as ‘‘virtual currency’’ or ‘‘digital currency,’’ operates as a decentralized, peer-to-peer financial exchange and value storage that is used like money. Some of the ARK actively managed Funds may have exposure to bitcoin, a cryptocurrency, indirectly through an investment in the ARK 21Shares Bitcoin ETF, a 1933-Act exchange traded product. Cryptocurrency operates without central authority or banks and is not backed by any government. Even indirectly, cryptocurrencies may experience very high volatility and related investment vehicles like ARKB may be affected by such volatility. As a result of holding cryptocurrency, the Fund may also trade at a significant premium to NAV. Cryptocurrency is also not legal tender. Federal, state or foreign governments may restrict the use and exchange of cryptocurrency, and regulation in the U.S. is still developing. Cryptocurrency exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware. Leverage Risk. The use of leverage can create risks. Leverage can increase market exposure, increase volatility in the Fund, magnify investment risks, and cause losses to be realized more quickly.

Health Care Sector Risk. The health care sector may be adversely affected by government regulations and government health care programs, restrictions on government reimbursements for medical expenses, increases or decreases in the cost of medical products and services and product liability claims, among other factors. Many health care companies are heavily dependent on patent protection and intellectual property rights and the expiration of a patent may adversely affect their profitability.

Biotechnology Company Risk. A biotechnology company’s valuation can often be based largely on the potential or actual performance of a limited number of products and can accordingly be greatly affected if one of its products proves, among other things, unsafe, ineffective or unprofitable. Biotechnology companies are subject to regulation by, and the restrictions of, the U.S. Food and Drug Administration, the U.S. Environmental Protection Agency, state and local governments, and foreign regulatory authorities.

Pharmaceutical Company Risk. Companies in the pharmaceutical industry can be significantly affected by, among other things, government approval of products and services, government regulation and reimbursement rates, product liability claims, patent expirations and protection and intense competition.

Additional risks of investing in ARK ETFs include market, management and non-diversification risks, as well as fluctuations in market value NAV. ETF shares may only be redeemed directly with the ETF at NAV by Authorized Participants, in very large creation units. There can be no guarantee that an active trading market for ETF shares will develop or be maintained, or that their listing will continue or remain unchanged. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions and frequent trading may incur brokerage costs that detract significantly from investment returns.

To view the top ten holdings for ARKK click here.

To view the top ten holdings for ARKQ click here.

To view the top ten holdings for ARKW click here.

To view the top ten holdings for ARKG click here.

To view the top ten holdings for ARKF click here.

To view the top ten holdings for ARKX click here.

ARK Investment Management LLC is the investment adviser to the ARK Funds.

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For example, if the innovation sleeve drifted to 7.5% or 2.5% for the portfolio with a 5% target, it would trigger a rebalance back to 5%. Keeping this same 2.5% band, if the portfolio with a 10% target were to drift to 7.5% or 12.5%, it would trigger a rebalance back to 10%.

In finance, standard deviation is a statistical measurement that shows how much an investment's returns vary from its average. It's a key indicator of investment risk and is used by investors and analysts to assess the potential returns and volatility of an investment.

Active Share is a measure of the percentage of stock holdings in a manager's portfolio that differs from the benchmark index.

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ARK’s statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. ARK and its clients as well as its related persons may (but do not necessarily) have financial interests in securities or issuers that are discussed. Certain of the statements contained may be statements of future expectations and other forward-looking statements that are based on ARK’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements.