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.
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 Name||Ticker||AUM Billions|
|ARK Genomic Revolution||ARKG||$8||$5||-37%|
|ARK Next Gen Internet ETF||ARKW||$5.5||$3.8||-31%|
|ARK Fintech Innovation||ARKF||$3.5||$2.2||-37%|
|ARK Autonomous Tech & Robotics||ARKQ||$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 Name||Ticker||AUM |
|ARK Genomic Revolution||ARKG||8||-1.26||-16%|
|ARK Next Gen Int ETF||ARKW||5.5||-1.50||-27%|
|ARK Fintech Innovation||ARKF||3.5||-1.08||-31%|
|ARK Autonomous Tech & Robotics||ARKQ||2.8||-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.
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.
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%.
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.
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 Names||Weight||3-mo. Return||Real Return|
|EXACT SCIENCES (EXAS)||4.84%||-26%||-15%|
|BEAM THERAPEUTICS (BEAM)||3.17%||-28%||-17%|
|CRISPR THERAPEUTICS (CRSP)||3.15%||-35%||-24%|
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.
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.
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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