The ARK Innovation ETF (ARKK) was poster child for the post-Pandemic stock boom with its blistering 149% in 2021.
Cathie Wood, CEO and CIO of Ark Invest, became a bonafide rockstar in the industry, and some folks thought she could be the next Peter Lynch or Warren Buffett.
In February 2020, Bloomberg called her “the best investor you've never heard of.”
But ARKK has fallen on hard times as expensive growth stocks came back down to Earth.
So let’s go through 7 things you need to know about the ARKK ETF.
Few people will ever read the prospectus for an ETF — but we just did.
So what is the ARKK ETF all about?
ARKK specializes in what it calls “disruptive innovation.”
In their words:
The Adviser defines “disruptive innovation” as the introduction of a technologically enabled new product or
service that potentially changes the way the world works. The Adviser believes that companies
relevant to this theme are those that rely on or benefit from the development of new products or
services, technological improvements and advancements in scientific research relating to the areas
of genomics* (“Genomic Revolution Companies”); innovation in automation and manufacturing
(“Automation Transformation Companies”), transportation, energy (“Energy Transformation
Companies”), artificial intelligence (“Artificial Intelligence Companies”) and materials; the increased
use of shared technology, infrastructure and services (“Next Generation Internet Companies”); and
technologies that make financial services more efficient (“Fintech Innovation Companies”).
In plain English, this means that ARKK invests in expensive, high-beta tech stocks.
And according to the prospectus, ARKK has to invest at least 65% of its assets in companies that follow the “disruptive innovation” theme. This is why ARKK can't just go to cash like an individual trader might.
The fund was launched on October 30, 2014, and currently has $16.1 billion in assets.
You know an ETF is wild when the most stable stock in its top 10 holdings is Tesla (TSLA)!
All of ARKK’s top 10 holdings are expensive, high-beta stocks that move really far, really fast:
ARKK has a beta of 1.54, meaning for every 1% the S&P 500 moves, ARKK moves 1.54%.
That means ARKK moves about 50% faster than the S&P.
Unfortunately, since ARKK peaked, those fast moves have been mostly to the downside.
When COVID-19 hit in early 2020, people began spending way more time at home, particularly for work.
That was bad for some sectors like airlines and restaurants.
But it benefited some of ARKK’s biggest holdings like Zoom (ZM), Teledoc (TDOC), and Roku (ROKU), all companies which benefited from more people being at home.
Plus, ARKK’s biggest holding was Tesla (TSLA), which had a monster 2020. .
You can call it luck or skill — but Cathie Wood got in the right names at the right time.
This chart compares the S&P 500 (on top) with ARKK (on bottom).
ARKK peaked at $160 on February 16, 2021… and then started sliding.
That was 11 months before the S&P 500 topped out at on January 4, 2022.
What happened? Why did ARKK flame out so much earlier?
Simple — because as the economy reopened ,“stay at home” names like Zoom (ZM) and Teledoc (TDOC) began dropping.
For example, Teledoc has falled 82% off its highs:
Traders’ declining tolerance for risky stocks also seemed to be a factor.
With the Fed pulling away the punchbowl to fight inflation, traders started shying away from the wild names.
So small caps underperformed in 2021, as did the ultra high-valuation tech stocks Cathie Wood favored.
New IPO names were also messy.
For example, ARKK has been a repeated buyer of Robinhood (HOOD), which has been in a hideous downtrend since its post-IPO peak.
Meanwhile, traders were shoveling cash into traditional tech stocks like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA).
Plus, energy, housing, and financials were big outperformers in 2021.
You don’t see those types of stocks in ARKK.
And in 2022, energy is the only sector that’s shining. OIH is up 24.3% and XLE is up 19.4%, while the S&P 500 is down -9.8%.
Meanwhile, ARKK is down 31%.
And if we’re considering all-time highs, ARKK is -59.1% off its high, while the SPX is off 10.8%.
Even with ARKK’s underperformance in 2021 and 2022, the fund is a staggering long-term success
According to Morningstar, ARKK has an 5-year average return of 28%, almost doubling its category average.
In this chart, ARKK is the blue line, and you can see it's still way above its category (red line):
As of this article, Morningstar rates ARKK as 4 out of 5 stars, putting in the top 32.5% of funds relative to category peers.
However, Morningstar ratings are backward looking so they’re not helpful in judging future performance.
If you follow social media chatter, particularly on Twitter, you’ll know that Cathie Wood has received a lot of criticism for her bold predictions,
For example, she recently said Bitcoin could hit $1 million by $2020.
Bitcoin would multiply in price 27 fold for that to happen.
In late December, she said she expected her strategy to deliver a compound return of 40% over the next five years.
That equates to a 460% return.
And many traders are desperate to see Wood capitulate and turn bearish, the idea being that if she gives up, high-growth stocks wilh have bottomed.
Interestingly, CNBC's Jim Cramer “drowned” ARKK on his Mad Money show:
I’ve disagreed with most of Cathie’s investment theses since last year (been in $SARK since its inception), but this is just brutal after today’s price action… @jimcramer $ARKK $TSLA $COIN $HOOD pic.twitter.com/oJ3YynrGfP
— sᴇɴᴛɪɴᴇʟ (@KryptoSentinel) January 27, 2022
In fact, Cramer recommended buying the Tuttle Capital Short Innovation ETF (SARK), which is designed to rise when ARKK falls.
Only time will tell us if shorting ARKK after a near-60% drop is the right move.
The media loves to build people up and then tear them down.
So take the criticism of Cathie Wood with a grain of salt.
Because who knows?
Maybe one day soon, she’ll be flying high again.
Is it due for a rebound?
Or are the glory days gone?