A recent post by Seeking Alpha Editor David Jackson pointed out that, of the 10 best performing ETFs YTD, 5 are run by ARK Invest: ARK Genomic Revolution Multi-Sector ETF (BATS:ARKG) +114% ARK Innovation ETF (NYSEARCA:ARKK) +101% ARK Next Generation Internet ETF (NYSEARCA:ARKW) +101% ARK Fintech Innovation ETF (NYSEARCA:ARKF) +75% ARK Industrial Innovation ETF (BATS:ARKQ) +63% Perhaps, even more impressive is that these 5 funds are the only active managed funds ARK Invest runs - and they are all in the top-10. ARK Invest also runs two indexed ETFs: ARK Israel Innovative Technology ETF (BATS:IZRL) +27% ARK The 3D Printing ETF (BATS:PRNT) +26% The Secret To Success According to the company, "ARK" stands for "Active, Research, Knowledge". I would add innovation and disruption to describe the keys to ARK's success. We can see how well the names of ARK's ETFs are closely aligned to the innovative and disruption of present-day technologies: Source: ARK Funds But, of course, it all comes down to portfolio management. ARK Invest is led by CEO/CIO Catherine Wood, who - if comments on Seeking Alpha are any indication - has become somewhat of an icon in the money management business. Considering the returns of the ARK funds, I'd say she has earned that moniker. Wood believes excellent investment opportunities exist in innovative fields such as DNA sequencing, robotics, artificial intelligence, energy storage, and blockchain technology. Investors can get a very good idea of Wood's investment philosophy by visiting ARK's mARKet Commentary webpage. The webpage is kept current with frequent updates and informative videos. Alternatively, ARK provides a free subscription service whereby investors can sign up to receive regular updates and attend monthly webinars that discuss various aspects of technical innovation and disruption in a number of different fields. To summarize, ARK has been significantly outperforming the market by investing in companies that provide asymmetric risk/reward opportunities with innovative and disruptive technologies. ARKW: The ARK Next Generation Internet ETF As mentioned earlier, the ARKW ETF is up over 100% so far this year. The fund has current net assets of $1.3 billion, typically holds 35-50 companies in the portfolio, and focuses on companies involved in the following fields: Cloud Computing & Cyber Security Ecommerce Big Data & Artificial Intelligence (AI) Mobile Technology and Internet of Things Social Platforms Blockchain & P2P The top-10 holdings are shown below along with their current and forward-looking P/E ratios, which were added by the author: Source: ARK Invest; P/Es from Yahoo Finance; FWD P/E from Seeking Alpha Investors can view all the fund's holdings here. Some quick observations on the top-10 holdings: The top-10 comprise ~40% of the fund's entirety, so a fairly concentrated group at the top. Tesla (NASDAQ:TSLA) is the #1 and ~10% weighted holding in 3 of ARK's 5 actively managed funds (ARKK, ARKQ, and ARKW) because it checks many of the boxes for what ARK is looking for: disruptive technology (i.e. EVs), automation (autonomous driving, robotic manufacturing), and battery storage. One might even add ecommerce, mobile technology, and IoT to the list. Much of ARKs success - but certainly not all - is because of its early stake in Tesla. As can be seen by the P/E data, the majority of the companies in the top-10 list are not currently making money and - by looking at the forward P/Es - many are not expected to make money over the coming 12 months. And even if they are expected to make money over the next year - other than Facebook (NASDAQ:FB) and HUYA (NYSE:HUYA) - the valuation levels would still be sky-high. In addition to Tesla, the ARKW's top-10 list includes companies across a broad spectrum of internet opportunities: Roku (NASDAQ:ROKU) for internet streaming of entertainment content, Facebook in social media, Square (NYSE:SQ) for secure contactless payment solutions, Sea Limited (NYSE:SE) which runs a fast growing internet and mobile online gaming platform, and Slack (NYSE:WORK) which operates a collaboration hub that enables people, information, and tools to more easily find and communicate with each other in order to get work done. While these companies are highly attractive in terms of their disruptive technology driven growth rates, it is the last bullet above that convinced me to choose ARKQ over ARKW (i.e. lack of earnings). Even though I was looking to choose an ETF for my portfolio's allocation to higher risk/reward investments, I still wanted more exposure to near-term profitability. As a result, my somewhat more traditional investment approach led me to choose what ended up being the worst performing ETF of ARK's "group of five" actively managed funds (that is, if you can call ARKQ's 60% YTD appreciation the "worst"...). How can that be? The reason is that these companies are sacrificing near-term profits in order to invest in exponential growth in the future. As a result, even though they don't have near-term earnings, the market is valuing them on future earnings. Cathie Wood recently said that they actually feel their portfolio is undervalued because the market is very inefficient at valuing companies with disruptive innovation. It's hard to argue with the results. The Approach Is Working (At Least For Now) ARK's nontraditional investment strategy - in which near-term profitability considerations take a backseat in favor of long-term capital appreciation potential due to technological innovation and disruption - is obviously working - and working very well. At least, for now. Investors should consider that we currently live in an era of unprecedented low-interest rates, which, according to Federal Reserve Chairman Powell, are likely to stay at or near zero until 2023. As a result, investors are increasingly looking to the equity markets for growth. And while the companies in the ARKW portfolio are certainly growing revenue, they are betting that, at some point in the future, that revenue growth will turn into growing profits. Ironic as it might seem, once these companies begin to become profitable, they may actually fall in terms of valuation because, at that point, they will be more "mature", and investors in disruptive innovation may begin to look elsewhere for the "next best thing". So, this is a risk going forward. Investors should also consider that the new era of younger "Robinhood Investors" may be attracted to these new innovative and disruptive companies - that many are familiar with and actually use - but have never lived through a bear market and may panic and bail when one actually hits - and if history is any indication, one will. That could be when interest rates begin to rise and investors can actually earn a decent rate of return on low-risk cash investments such as money market funds, CDs, and bonds. But that seems at least a couple years out. Still, it's a risk investors should be aware of. Active Management At the risk of repeating myself, the primary reason ARK Invest is outperforming its peers is because of superior portfolio management. And - unlike most all other ETFs - ARK is very transparent with respect to its trades. Investors can actually sign up to receive ARK ETF trading notifications. For instance, last Friday, the ARKW ETF took advantage of the 14% pop in Xilinx (NASDAQ:XLNX) to sell ~69,000 shares. XLNX had popped higher on rumors that Advanced Micro Devices (NASDAQ:AMD) may be preparing a $30 billion buyout bid. Note ARKW's current holdings (as of 10/9/2020) reported it still had a 398,575 share position in Xilinx - so the selling was a bit of profit taking as opposed to ARKW totally exiting the position. This seems prudent, given speculation that XLNX may not agree to a buyout. But the point here is that the fund is actively managed, and investors can watch what management is doing on a day-to-day basis - and perhaps get some insight into potential single stock investments. ARKW also increased its holdings in the Grayscale Bitcoin Trust (GBTC) and Slack on Friday. Summary & Conclusion The ARKW Next Generation Internet ETF is an actively managed fund that has been extremely successful due to the non-traditional investment strategy that Cathie Wood and her team have used to identify companies on the leading edge of innovative and disruptive technologies. For now, that strategy has been working very well, and investors don't mind paying the relatively high 0.76% expense ratio to get such outsized returns. However, the fund is on the high-end of the risk/reward curve as many of the companies are not yet profitable, may not be profitable next year, don't pay dividends and, as a result, are trading at extremely high valuations. In a rip-roaring bull market like the one we are currently in, I would advise investors wanting exposure to a higher risk/reward ETF like ARKW (or any of the ARK funds for that matter) to dollar-cost average -into the position. As my followers know, I am kind of boring and believe in the traditional well-diversified portfolio approach to investing. That portfolio includes individual stocks in the technology/energy/utility sectors, gold, real estate, sector ETFs like the Invesco Nasdaq-100 (NASDAQ:QQQ), Consumer Staples ETF (NYSEARCA:XLP) and healthcare, income-specific investments like Enbridge (ENB), and foreign exposure through vehicles like the SPDR S&P China ETF (NYSEARCA:GXC). Part of my portfolio approach is a 5-10% allocation to higher risk/reward investments. That slice of my portfolio includes the ARK ARKQ ETF and some small- and large-cap technology stocks. I am considering swapping out one of my tech stocks for the ARKW ETF. The biggest "problem" I have had over the past few years is keeping my high risk/reward allocation at or below 10%. So, just as the ARK management team manages its portfolios, I would encourage investors to actively manage their own portfolio in order to stay on plan with their sector allocation strategy. Disclosure: I am/we are long ENB, XLP, QQQ, GXC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.