Why Are ARK Invest’s ETFs Falling?

There’s no such thing as bad publicity. Sometimes what’s perceived as a public relations fiasco is actually a clever way to get free eyeballs on your product. Call someone a retard on a conference call and the Twitter police will quickly put you in your place by telling the entire world about what you’ve been up to. The same holds true for anyone who has achieved any level of success in the investing world. The critics are always there to point out your shortcomings by pouring cheap whiskey on your hopes and dreams.

Image of Jim Cramer literally drowning Cathie Wood's ARK as flagship fund falters
A waste of ethanol and oxygen – Credit: MSNBC

As the amount of ARK Invest criticism reaches a crescendo, we thought it was prudent to revisit last year’s piece on ARK Invest’s Strong Appetite for Risk which warned investors about “the ARK effect.”

ARK’s Midas touch means whatever stocks they invest in become self-fulfilling prophecies as traders move quickly to trade off those signals. But hype and tons of capital will only take a company so far unless they can produce an economically viable product or service that generates meaningful revenue growth.

The takeaway for disruptive tech investors is simple. If you’re invested in a stock that ARK is holding a large position in, it better be one you’re comfortable buying at a much cheaper price.

Credit: Nanalyze

That was in May of 2021 when we sold our ARK Innovation ETF holding and used the proceeds to invest in a battery stock and a cybersecurity ETF. Here’s how the assets under management (AUM) for ARK’s ETFs have changed since then.

ETF NameTickerAUM Billions
May 2021
AUM
Billions
Jan 2022
Percent Change
ARK InnovationARKK$20$16-20%
ARK Genomic RevolutionARKG$8$5-37%
ARK Next Gen Internet ETFARKW$5.5$3.8-31%
ARK Fintech InnovationARKF$3.5$2.2-37%
ARK Autonomous Tech & RoboticsARKQ$2.8$2.2-23%

This is when things start to get tricky because we need to differentiate between two reasons assets in an ETF might fall:

  • Stocks fall – an ETF is a bucket of stocks, the value of which – net asset value (NAV) – can be measured at any given time. When stock prices fall, NAV falls.
  • Investors withdraw money – in industry parlance, this is referred to as “outflows.” When outflows happen, the portfolio manager needs to sell assets to reduce their exposure to match their assets under management.

When an ETF manager needs to sell stocks because of outflows, that selling puts downwards pressure on the price of stocks. As stocks fall, more investors may sell the ETF which puts further pressure on the price of its assets. Fortunately, ETF.com has a tool that lets you query ETF outflows over certain time frames. Let’s look at net outflows for all of ARK’s ETFs since we last looked at them in May of 2021.

ETF NameTickerAUM
May 2021
Outflows
(billions)
% Reduction
ARK InnovationARKK20-2.34-12%
ARK Genomic RevolutionARKG8-1.26-16%
ARK Next Gen Int ETFARKW5.5-1.50-27%
ARK Fintech InnovationARKF3.5-1.08-31%
ARK Autonomous Tech & RoboticsARKQ2.8-0.84-30%

ARK’s two largest ETFs have held up quite well given how much the pundits talk about the sky falling. That said, we’re surprised to see how concentrated ARK’s ETFs have become over time. Here’s an analysis we did in May 2021 which shows the commonality of stocks found across ARK’s largest ETFs by looking at the top 15 holdings of each.

ARK ETF stock concentration in May 2021 - Credit: Nanalyze
ARK ETF stock concentration in May 2021 – Credit: Nanalyze

There is some crossover between ETFs, but each seems to have a good selection of unique names. Now, let’s perform the same analysis today.

ARK ETF stock concentration today - Credit: Nanalyze
ARK ETF stock concentration today – Credit: Nanalyze

The concentration of names across all five ETFs has increased dramatically with some names being suspect. Is Teladoc (TDOC) really a fintech firm? They’re so bullish on UiPath (PATH) that they’ve managed to force-feed it into nearly all their ETFs, even the ARK Space ETF. With such an increase in concentration, selling pressure on one ETF will affect the others. Essentially, ARK’s appetite for risk has been increasing over time. Taking on more risk means more potential reward, but we prefer – especially after a decade-long bull market – to minimize our risk. The top-15 names in the ARK Innovation ETF are all found in ARK’s other ETFs, so the entire thing has become rather incestuous. Let’s take a closer look at how ARK’s flagship ETF has been handling it all.

The ARK Innovation ETF

As disruptive technology stocks crater, it should be no surprise that ARK’s flagship ETF is also taking a drubbing. In looking at the five-year return for the ARK Innovation ETF, it’s clear that a correction is underway. From the high-water mark of $159.79 reached in February 2021, shares have fallen -57%.

Our red arrow shows the market's reaction to the Rona - Credit: ARK Invest
Our red arrow shows the market’s reaction to the Rona – Credit: ARK Invest

The red arrow above points to when the market reacted to the trillions of dollars in value that evaporated when a global pandemic crippled the travel industry and rocked the world’s supply chains. Prior to that “correction,” shares of ARK were trading around $58 a share. Today, they’re trading at around $69 a share – a premium of about +19%.

Some of the meteoric rise of ARK’s ETF has been attributed to serendipity. A handful of ARK’s biggest holdings were perfectly positioned to benefit from the pandemic – think names like Zoom, Teladoc, and Square Block. But as we’ve argued before, the pandemic is a temporary investment thesis, and tech investors shouldn’t try to chase it. So is ARK’s ETF falling because the temporary headwinds from the pandemic have been more than offset by the massive impact the world’s supply chains are experiencing from the bullwhip effect?

It’s not just the stocks that ARK holds which are plummeting, it’s the entire market. Using some rudimentary technical analysis, we can see that ARK’s ETF started its breakdown in late November – about three months ago.

The three-month return of the ARK Innovation ETF - Credit: ARK Invest
The three-month return of the ARK Innovation ETF – Credit: ARK Invest

Here’s how the broader market performed over the last three months compared to ARK’s Innovation ETF:

  • ARKK: -43%
  • NASDAQ: -11%
  • S&P500: -5%

To be fair, we should attribute -11% of ARK’s bad performance to the overall performance of the broader tech market – the NASDAQ index. So ARK’s real three-month return is more like -32%. Here are the real returns of the ARK Innovation ETF’s top-15 constituents over the past three months (linked company names point to our research).

ARK Innovation ETF Top-15 NamesWeight3-mo. ReturnReal Return
TESLA (TSLA)8.07%-24%-13%
ZOOM (ZM)6.51%-48%-37%
TELADOC (TDOC)6.50%-53%-42%
ROKU (ROKU)6.43%-50%-39%
COINBASE (COIN)5.15%-44%-33%
EXACT SCIENCES (EXAS)4.84%-26%-15%
UNITY (U)4.43%-37%-26%
SPOTIFY (SPOT)4.31%-40%-29%
INTELLIA (NTLA)4.07%-35%-24%
UIPATH (PATH)4.06%-33%-22%
TWILIO (TWLO)4.03%-35%-24%
BLOCK (SQ)3.72%-57%-46%
BEAM THERAPEUTICS (BEAM)3.17%-28%-17%
CRISPR THERAPEUTICS (CRSP)3.15%-35%-24%
SHOPIFY (SHOP)2.93%-41%-30%

All these names can be found in other ARK ETF’s, so further outflows from any ETF could exacerbate these losses. We have meaningful exposure to three names on this list and a small amount of exposure to several gene-editing companies. Our overall exposure to names that ARK holds is minimal, yet our own portfolio is also being punished, including foreign tech stocks that ARK won’t even dabble in.

Because ARK has become an iconic name in disruptive tech investing, they’re an easy scapegoat to point the finger at. Their past success in raising funds means they’re viewed with a certain degree of envy suspicion, so it’s to be expected that critics are crawling out of the woodwork to deride their poor returns. Let’s just remember that this bull has been running for a long time now, and we shouldn’t be surprised that it wants to stop to rest. Here’s a look at the 10-year chart for the Nasdaq-100 with the impact of the pandemic denoted with a red arrow.

The 10-year return of the Nasdaq-100 - Credit: Yahoo Finance
The 10-year return of the Nasdaq-100 – Credit: Yahoo Finance

For the Nasdaq to fall to the same level it was immediately prior to the pandemic “correction” of March 2020, it would still need to drop a further -38%, and there’s no reason it can’t. Unless you’re comfortable with large drawdowns, you shouldn’t be invested in tech stocks, or ETFs like those on offer from ARK.

Conclusion

In the same way people who hate Joe Rogan have never listened to Joe Rogan, people who jump on the “bash Cathie Wood” bandwagon should try to understand why her funds are faltering. Perhaps the market shouldn’t be trading above where it traded prior to reacting to the Rona, so this correction seems entirely merited. Outflows from ARK’s funds haven’t been excessive, but they’ve become riskier vehicles since ARK has further concentrated their bets. If you’re holding stocks that ARK holds, “the ARK Effect” can go both ways. And lately, that’s been downwards.

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8 thoughts on “Why Are ARK Invest’s ETFs Falling?
  1. In general I like ARK stocks selection in their portfolio.
    However I have some doubts on the validity of ARK having very large positions for some stocks.
    Eg no 4 Zoom ($869M), no 6 Exact Sciences ($863M).
    I also don’t understand why they were so bullish on Palantir in 2021: they were buying it a lot. PLTR is now no 16: $410M.
    On the other hand I am surpised they closed their position for Illumina (ILMN).

    1. ARK is an active portfolio manager which means there is loads of behind-the-scenes complexity we’re not privy to. Trying to understand their decisions is like observing a chess game without knowing the rules. That’s our thoughts anyways, and we’ve always avoided (as much as humanly possible) making any investment decision based on what ARK does.

  2. “Zoom signals an end to pandemic boom times, and the stock is falling
    Executives predict revenue will grow much slower and profit will decline in 2022 as they attempt to build out the videoconferencing platform, but promise a $1 billion share repurchase to cushion the blow”

    ARK Zoom position is no 8 (in January it was no 4): $870M. I don’t think it is wise to bet on Zoom now, post pandemic .. They will probably lose money on it.

    1. Zoom is starting to approach pre-pandemic levels, so the pendulum could be swinging too far in the other direction. We haven’t dabbled in this stock, so we don’t have a dog in the race.

  3. Cathie Wood and ARK Invest made an aggressive call that Zoom Video Communications (NASDAQ:ZM) could reach a stock price of $1,500 by 2026. That would equate to more than 13 times its current stock price of around $112 and would represent compounding annual growth of 76%.
    Wood, who has long been a bull on ZM, noted that ARK’s bull case scenario suggests that the stock could rise as high as $2,000. Even her bear case points to a stock price of $700 — more than 6x current levels.
    Current ZM price: $110.

    1. We may look to do a piece on the Zoom bull thesis that helps explain those aggressive price targets.

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