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ARKQ vs. ROBO: Battle of edgy tech ETFs

Technology is the best-performing sector in the S&P 500 year-to-date, rallying more than 16 percent, but funds focused on companies at the cutting edge of technology are really reaping gains.

Consider two competing strategies at the center of technology innovation: the ARK Industrial Innovation ETF (ARKQ), with $45 million in assets under management, and the ROBO Global Robotics and Automation Index ETF (ROBO), with nearly $550 million in AUM.

They are each designed to capture the benefits of technological advancements across various industries. They aren't purely tech ETFs as much as they are niche ETFs that focus on new technologies impacting various industries.

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These funds are delivering different results relative to each other, and relative to the Technology Select Sector SPDR Fund (XLK) — which captures all tech stocks in the S&P 500. Here's their year-to-date performance:

There are three differences between the two funds.

Active vs. passive

ARKQ isn't a broad tech fund. It's a high-conviction and concentrated ETF that invests in companies that benefit from automation and other tech advancements. That conviction, as Cathie Wood, CEO of ARK Invest, puts it, centers on "deep research" — both bottom up and top down — that go into choosing securities for the portfolio. ARKQ is actively managed.

Sometimes ARKQ buys into companies it believes in even when the market is discounting them — a freedom the fund has to move around due to its active management.

For example, late last year, ARKQ added two 3-D printing names, Stratasys and Materialise, as well as Tesla, "as they were getting pummeled." These positions really paid off. Stratasys is up some 85 percent this year, while Materialise is up 69 percent and Tesla is up 45 percent. Together, these three stocks represent almost 30 percent of the total portfolio.

"Because of the depth and breadth of our research, both top down and bottom up, I have the conviction as a portfolio manager to add significantly to positions when they are under assault for some short-term reason that does not derail our longer-term thesis," Wood said.

ROBO, meanwhile, is passive. It tracks a proprietary global index of companies involved in robotics and automation. And of these three blockbuster-performing names, it only owns Stratasys, with an allocation of 1.05 percent.

Concentration vs. diversification

Both ETFs have vague mandates, and ARKQ's is arguably broader, because it can essentially hold any company that develops or benefits from new technology, though it focuses particularly on energy, automation/manufacturing, materials and transportation, according to FactSet. ROBO holds only companies related to robotics and automation.

But the number of securities in the portfolios are very different. And it's ARKQ that is more concentrated.

That concentration is working well for ARKQ this year, being one of the sources of the fund's 10-percentage-point lead over ROBO and 13-point lead over XLK. The fund owns only 27 stocks, and its top holding represents 13 percent of the portfolio — just one single stock, which is Tesla.

Oftentimes, however, it is diversification that wins the race because a broadly diversified portfolio can better dilute poor performance of individual securities, preventing a handful of stocks from dragging overall returns.

ROBO is the more diverse of the two, with a portfolio that has more than 80 securities, and one that assigns weights to its underlying holdings much more evenly. The fund's biggest holding represents only 2.5 percent of the mix.

In 2016, it was ROBO that outperformed ARKQ. Concentration is working well for ARKQ in 2017, but that's not always the case, as the chart below shows:

Charts courtesy of StockCharts.com

Country and sector focus differ

ROBO is also more diverse in country exposure — it's a global portfolio of equities involved in robotics and automation. The U.S. represents about 45 percent of the fund's country allocation, followed by Japan at 26 percent and Taiwan at 7 percent.

ARKQ is 95 percent allocated to the U.S., giving it a strong domestic bias.

Sector exposures are also very different between the two funds. ROBO is nearly 60 percent tied to industrial names, followed by technology at 27 percent and health care at 7 percent. ARKQ assigns 21 percent to software and IT services, and 17 percent to automotive industry.

In the end, while ARKQ uses a combination of top-down and bottom-up active management, ROBO is primarily top-down, trying to capture the performance of the robotics and automation theme, "for good or ill," according to FactSet.

"Ultimately, the two funds performed well for different reasons," said Scott Burley, analyst at FactSet. "ARKQ's performance was driven by storage and peripheral hardware, software and automobiles. ROBO's was driven by machinery, and electronic instruments and components."

Niche ETFs unique in their own way

It's important to remember that when it comes to niche ETFs, comparison of funds is hardly apples to apples. An active, U.S.-heavy tech innovation ETF will offer exposure that's different than an index-based robotics fund, no question about it. These two funds have only 45 percent overlap on an industry basis, and 12 percent on an individual holding basis, FactSet data show.

But the exercise of comparing the two is still valid, as investors look for what ETFs best offer them the niche access they are looking for in a field of cutting-edge tech innovation. Both ARKQ and ROBO would fit the bill for that type of equity allocation.

These niche ETFs are increasingly popular with investors, taking in assets this year at a strong pace.

Hefty creations

ROBO, the bigger of the two, has attracted some $360 million in fresh net assets year-to-date—a considerable amount of creations when you consider that the four-year-old fund has $548 million in total assets under management today.

ARKQ, too, has seen its total AUM shoot up to $44 million this year thanks in part to year-to-date inflows exceeding $20 million. ARKQ launched in September 2014.

And if these funds differ in approach and exposure, their price tags aren't all that different. ARKQ costs 0.75 percent in expense ratio while ROBO costs 0.95 percent — that's $75 and $95 per $10,000 invested, respectively.

By Cinthia Murphy, ETF.com