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Innovations within the realms of technology and industrials have been a prominent theme in 2023 and likely still have a ways to go. Namely, trends like generative artificial intelligence, hyper-automation, and robotics have all proliferated this year. These same innovations continue to leave individuals on the edge of their seats in anticipation of how they will alter work and everyday life. One of the most prominent trends of the bunch is artificial intelligence (AI), which is yet to stop creating opportunities for profit.

The ARK Autonomous Technology & Robotics ETF (BATS:ARKQ) dabbles in disruptive innovation such as AI, which could make it a fruitful investment sooner rather than later. However, as much as this ETF's strategy revolves around capitalizing on disruptive innovation, ARKQ doesn't appear to be reaping the same benefits of the ongoing hype around AI. Given that generative AI could be some of the most disruptive forms of innovation seen in a while, this actively-managed ETF may have room for improvement. That being said, ARKQ could still run with the AI hype, just maybe not as well as some of its potential alternatives. I rate this ETF a Hold.

ARKQ is heavily focused on capital appreciation. The most relevant industries in this ETF are therefore oriented around growth rather than value. Investors may want to consider this as a possible upside in the coming periods as growth stocks begin to rebound from an arduous 2022.

ARKQ does not track a specific index and instead uses the results of internal research and analysis to determine which companies will best capitalize on disruptive innovation. Disruptive innovation companies are those that benefit from the development of innovative products or services, technological improvements and scientific research. Such disruptive innovation realms include but are not limited to genomics, automation, transportation, energy, fintech, and artificial intelligence.

Though this ETF dabbles in many areas that are accelerating in 2023, this ETF is quite expensive with a ratio of 0.75%. With its strong capital appreciation focus in mind, ARKQ also does not pay a dividend.

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ARKQ invests mainly in technology and industrials, allocating roughly 70% to these two sectors alone. The remaining portions are filled mainly by consumer cyclicals, communication and healthcare.

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This ETF's holdings are located almost exclusively in the United States, with virtually unnoticeable appearances within East Asia, Canada, and Israel.

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ARKQ is quite highly-concentrated in that its top three holdings comprise almost 30% of the entire fund. Additionally, Tesla (TSLA) alone accounts for almost 15%. This ETF could therefore be considered top-heavy. This aspect could be advantageous or detrimental depending on how one weighs the importance of transparency versus granularity across individual holdings.

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Robotics and Automation may be positioned to lift off in the near future, however this space is not recession proof. As seen in the chart below, ARKQ struggled significantly amid the harsh October rate hikes compared to some of its potential alternatives.

Data by YCharts

Though this ETF has decent growth potential, it may also suffer from inadequate inflation-hedging abilities as the United States economy proceeds through treacherous territory.

AI could catalyze robotics and automation and subsequently drive up the price of ARKQ, but even then I think this ETF could remain mostly inferior to more AI-oriented funds.

Data by YCharts

In particular, the Global X Robotics & Artificial Intelligence ETF (BOTZ) also provides robotics exposure but with an extra kick of AI. I believe ARKQ could have trouble competing with BOTZ and similar ETFs as AI continues hogging a lot of the market hype.

Tesla is a symbol of disruptive innovation that I believe could carry ARKQ far in the long-term. However, this path is likely not going to be smooth. Tesla's stock performance is significantly fueled by hype and speculation, which could be a long-term threat. Speculators are still waiting for vehicles like Cybertrucks and Robotaxis that were announced over four and two years ago, respectively. Tesla's tendency to feed on hype makes it a rather volatile security, which also contributes to high risk in ARKQ.

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Economic conditions could get much worse as inflation remains high and quite far from the Fed's goal of 2%. Past performance does not necessarily project into the future. However, ARKQ's performance during the back half of 2022 may raise questions as to just how prepared this ETF is for future interest rate hikes. In regards to Tesla, economic downturn also is likely to make it even harder to turn vehicle concepts into reality. This is because electric vehicle production and scaling is very capital-intensive. Furthermore, ARKQ's high expenses could deter many investors, especially when BOTZ is cheaper and may be better positioned to profit.

As robots' competency in the workforce strengthens, so does the concern that such machines will replace humans to the point where the labor market suffers. This case is proliferating now more than ever as AI-powered robotics are becoming uncannily similar to humans. Emerging examples include industrial robotics taking over manufacturing jobs as well as autonomous vehicles overtaking traditional ridesharing services. Labor market disruption on behalf of robotics and AI could conjure ethical issues, concerning levels of unemployment, as well as other social and economic challenges that are beyond the current scope.

This year has so far been one of momentous innovation, which could bring ARKQ and similar ETFs to light in the coming time. Furthermore, the hype around innovation may increasingly narrow to center mainly on AI, with other areas like robotics, genomics, and automation being more secondary. I think that ETFs that can optimally capitalize on AI development may therefore be the ones to which staying afloat is the easiest. Based on how ARKQ continues to lag behind the ongoing AI hype, the medium term could be an important test for this ETF. I rate ARKQ a Hold and plan to watch it very closely in the meantime.

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ARKQ: This Disruptive Innovation ETF Inadequately Capitalizes On ... - Seeking Alpha