Ark Invest recently launched its ARK Space Exploration & Innovation ETF (BATS:ARKX) ETF, but investors should think twice before buying in. The ARKX ETF may be a much riskier bet than it seems at first glance.

Cathie Wood, CEO of Ark, has been one of the hottest stock pickers in the world in recent years, but a quick look at top ARKX ETF holdings reveals some head-scratching investment choices.

Previous space exploration ETFs have lagged the market, and the ARKX ETF is off to a lackluster start as well. Although Wood’s performance has been spectacular in recent years, she also has her fair share of critics when it comes to risk management.

ARKX ETF Has Questionable Holdings

Ark describes the ARKX ETF as a fund that invests in aerospace and technology companies that are engaged in space exploration and innovation. When the fund launched on March 30, two holdings in particular were the subject of countless memes on social media.

ARKX’s initial holdings included agriculture equipment company Deere (NYSE:DE) and streaming video platform Netflix (NASDAQ:NFLX).

The space tractor memes practically photoshop themselves.

Whether you love or hate Ark and Wood, it’s very reasonable to ask what the heck Netflix and Deere have to do with space travel. Sure, Netflix may benefit from high-quality satellite internet, and Deere has a small exposure to GPS technology, but you have to bend over backward pretty hard to make those loose ties.

“The problem is that there are almost no pure-play public space companies, so Wood has filled it with stocks that have nothing to do with space,” former hedge fund manager Whitney Tilson says.

But the problem isn’t just with stock selection. Some critics have questioned Ark’s concentration in relatively small and illiquid stocks.

For example, 3D printing company Trimble (NASDAQ:TRMB) was initially the largest holding in the ARKX ETF. The fund’s second-largest holding was Ark’s own 3D Printing ETF (BATS:PRNT). The PRNT ETF also owns a lot of Trimble.

Tilson says investors should tread carefully when it comes to the ARKX ETF, which he says is simply the latest sign of “speculation and foolishness in the markets.”

ARKX Isn’t the First Space ETF

The ARKX ETF may be the highest-profile space exploration ETF, but it’s not the first.

The SPDR S&P Kensho Final Frontiers ETF (ARCA:ROKT) launched back in October 2018. Since its inception, the ROKT fund has generated a total return of 41.7%. That performance is not terrible, but it’s certainly not good. The S&P 500 ETF Trust (NYSE:SPY) has generated a total return of 56.7% in that time.

The Procure Space ETF (NASDAQ:UFO) launched back in April 2019. Its total return since inception is 35.7%, again lagging the 48% return of the SPY ETF in that stretch.

In a nutshell, the space theme may eventually be a lucrative theme for investors, but it certainly hasn’t been so far. It’s only been a couple of weeks since its launch, but ARKX has so far followed in the footsteps of the previous two space ETFs and is lagging the SPY up to this point.

Cathie Wood and Survivorship Bias

The final point I’d like to make about the ARKX ETF is about Cathie Wood herself. Wood’s supporters trust her investing prowess and they don’t care what stocks she puts in her space ETF and why.

In the past year, the ARK Innovation ETF (NYSE:ARKK), Ark’s flagship fund, has more than tripled the return of the overall S&P 500. Wood’s supporters see that outperformance as evidence of her stock-picking skills. In reality, it may simply be their survivorship bias.

Survivorship bias is a cognitive bias that clouds the judgment of extremely aggressive investors. Here’s how it works.

When we see a penny stock trader who generates a 1,000% gain in a year, our bias suggests that he or she is an expert penny stock trader. In reality, that trader may just be the one in a million penny stock traders who got lucky enough to survive that highly risky strategy and pull off a 1,000%-return miracle.

I’m not saying Wood has simply gotten lucky. However, the ARKK ETF has highly concentrated positions in high-growth tech stocks. During a bull market with 0% interest rates, those high-beta names are typically going to outperform the market.

Morningstar analyst Robby Greengold recently criticized ARKK’s risk management and pointed out that Wood ran similar funds during her time at AllianceBernstein.

“She honed her thematic-oriented process at AllianceBernstein from 2001 to 2013, where she ran several strategies similar to this one that had high volatility, poor downside performance, and underwhelming long-term results during her tenure,” Greengold said.

Maybe Wood has learned to be a better stock picker since 2013. Or maybe she is simply making large, highly concentrated bets on high-risk stocks in a bull market.

How to Play It

Space travel and exploration may be lucrative investment themes in the long term, but there’s no good way to invest in the themes at this point.

To me, the ARKX ETF is more about branding than space. At best, it may trade roughly in line with the overall market. At worst, a market downturn could trigger a mass exodus from ARKX, ARKK and other Ark funds. I recommend investors stay away from the ARKX ETF.

On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.