Can the Ark Innovation ETF stay afloat in a post-pandemic world?

The ARK Innovation ETF’s [ARKK] share price plunged nearly 35% from $156.58 on 12 February to $102.16 at 12 May’s close.

The active ARK Innovation ETF, which invests in disruptive innovation companies developing new products or services, technological improvements and advancements in scientific research such as DNA, has recorded a year-to-date daily total return of -14.77% (as of 12 May), according to Yahoo Finance.

In addition, according to CNBC, over $1.1bn of assets have been pulled this month. Tesla [TSLA], the fund’s top holding with a 10.30% weighting on 13 May, has seen its share price drop from its recent peak of $883.09 on 26 January to $589.89 at close on 12 May. The second-biggest holding, Teladoc Health [TDOC], which was weighted at 6.18%, has plunged 52.4% from its latest peak of $294.54 on 8 February to $140.08 on 12 May. In third-place is Roku [ROKU] with a 5.54% weighting, which has slid from $467.31 on 19 February to $308.03 on 12 May.

Other main holdings such as Square [SQ] and Shopify [SHOP] have also seen recent share price falls.

The growth in ecommerce in 2020 helped Shopify, more demand for digital payments helped Square and streaming media platform Roku benefited from people staying at home more and looking for entertainment.

Last year, too, saw Tesla’s share price accelerate, helped by surging demand for electric vehicles (EVs). Teladoc’s technology was utilised more often during lockdowns, as were other key holdings such as video conference group Zoom Video Communications [ZM].

Why the reverse?

The sight of global lockdowns coming to an end has got some investors worried about lower demand for the ARK Innovation ETF’s key holdings when more of society re-opens. Tesla has also had investor concerns, including weaker Chinese sales.

The ETF has also been the victim of a broad technology market selloff resulting from the prospect of rising inflation. Technology stocks receiving high valuations are based on future cashflow prospects. As inflation climbs, the value of that declines.

“If you're valuing a high-growth company based on its earnings 10 years out, those earnings into the future are worth a lot less today at higher inflation levels,” Dan Eye, head of asset allocation and equity research at Fort Pitt Capital Group, told Reuters.

AJ Bell investment director Russ Mould agrees that sentiment over historically lofty valuations could be changing. “Electric vehicle stocks, SPACs, IPOs and cult tracker funds like [the] ARK Innovation [ETF] are all [now] taking a beating,” he says.

“Perhaps [the threat of] inflation is persuading investors to look for cheap recovery plays that could offer rapid earnings growth now, in the event of a strong post-pandemic economic upturn, rather than keep buying expensive stocks that are promising profits growth a long time in the future.”

"Perhaps [investors don't want to...] keep buying expensive stocks that are profits growth a long time in the future" - Russ Mould, AJ Bell

However, although share prices have changed, the narrative around innovative stocks has not. Tesla is likely to keep benefiting from growing demand for EVs as governments around the world strive to cut carbon emissions while other indicators for ecommerce, digital health and payments and DNA/genetic medicines also look positive.

So, despite the short-term drawdowns, the central concept of the ARK Innovation ETF — that Cathie Wood, founder and CEO of Ark Invest (pictured), is exposing investors to multi-decade growth themes — remains strong.

“The whole idea of an ETF is to play out its theme over time,” Dana Blankenhorn wrote in InvestorPlace.

“Wood’s thesis is that, over the long run, the disruptive technologies will transform the economy, to the benefit of disrupters. Over the long run, the theme of disruption does work. But over the short run, piling into disrupters leaves these stocks overvalued. If you buy ARKK stock today, you are betting Wood will recognise when that happens and sell, just like any other smart fund manager.”

"Over the long run, the theme of disruption does work" - Dana Blankenhorn, InvestorPlace

Indeed, Ark Invest is grabbing opportunities such as snapping up shares of technology firm Palantir [PLTR]. “[Our] long-term focus allows us to buy if a name has been hit for short-term reasons or sell if a name is up on short-term exuberance,” Ark Invest’s chief operating officer, Tom Staudt, told CNBC.

Blankenhorn added: “Over the long run, Wood’s theme is correct. Buy the future and profit when it arrives.”

Yes, there are concerns over rising inflation and interest rates.

“The future ARKK stock price is unlikely to resemble its spectacular past,” Cliff D’Arcy wrote in The Motley Fool.

That said, there will likely be plenty of other investors willing to get on board the ARK Innovation ETF, even in these present choppy waters.