Why the Ark Innovation ETF saw big returns in Q2

The Ark Innovation ETF [ARKK] has had a stellar 2020, having started the year at $50.64 to sit at $82.52 as of 21 July — a 62.9% rise. Much of this growth occurred in Q2 after a flood of coronavirus fears left the ETF languishing at a low point of just $34.69 in mid-March.

Furthermore, investors have added a record $1.7bn to the Ark Innovation ETF this year, bringing total assets under management to $4.6bn.

So what’s been driving the Ark Innovation ETF’s performance, and can it continue?

Driven by disruptors

The actively managed Ark Innovation ETF was first launched on 31 October 2014 by Ark Invest, focusing on companies providing disruptive innovation — tech-enabled products or services that have the potential to change the way the world works — in areas such as DNA research, industrial innovation, next-generation internet and fintech.

The Ark Innovation ETF has holdings that include electric vehicle maker Tesla [TSLA], with the largest weighting at 10.21%, payments firm Square [SQ] with 7.79%, gene editing therapy group CRISPR Therapeutics [CRSP] with 6.28% and education technology outfit 2U Inc [TWOU] with 4.54%.

Tesla, The Ark Innovation ETF’s biggest holding, has seen its shares leap from $424.50 at the start of 2020 to $1,568.36 on 21 July, on the back of impressive delivery numbers despite the pandemic disruption. In January, Tesla posted its first annual operating profit, and its upcoming Q2 announcement is expected to bring more good news.

Square, whose shares have dialled up from $62.99 at the start of 2020 to $126.99, has benefited from the accelerating shift towards cashless transactions during the pandemic. CRISPR Therapeutics, up 54% so far this year, has been helped by encouraging trial results for cancer and sickle cell disease treatments.

Remote learning for both domestic and foreign-based university students, meanwhile, has helped 2U to score highly and its share price has almost doubled this year, rising from $24.16 to $44.43.

“It’s been a fascinating time to be an active manager,” Cathie Wood, the founder and chief executive of Ark Invest (pictured), told MarketWatch.

“Companies make plans to adopt new technologies, but sort of take their time. They will take a three- to five-year look at the investment cycle. What has happened [during the pandemic] is well-established companies were not well set up for a digital workplace. We heard about a lot of struggles taking place out there and a determination to say, finally, we have got to get onto the newest platforms. It’s an accelerated shift toward the technologies that are faster, less expensive, more productive and allow for more creativity.”

“We heard about a lot of struggles taking place out there and a determination to say, finally, we have got to get onto the newest platforms. It’s an accelerated shift toward the technologies that are faster, less expensive, more productive and allow for more creativity” - Cathie Wood, founder & chief executive of Ark Invest

Bloomberg is also bullish about the fund, saying in late June: “It’s actively managed, which appeals to those looking for help navigating the markets during the pandemic.”

ARKK: The Tesla ETF?

There have been some suggestions that Ark is little more than a Tesla ETF, and is, therefore, hostage to the car maker’s performance.

Some analysts, and short-sellers, believe Tesla is way overvalued and that its share price is set to reverse. If that is the case, then the Ark Innovation ETF will likely also suffer.

But if Tesla’s price does keep climbing, then Tesla short-sellers may be forced to cover their positions, benefiting the Ark Innovation ETF in turn.

“They were once a start-up. They’re now a major auto manufacturer. I wouldn’t doubt that there are some imperfections in the car, but what I think we see happening is that consumers still love them,” Tasha Keeney, analyst at Ark Investment Management, said regarding Tesla’s prospects.

“They were once a start-up. They’re now a major auto manufacturer. I wouldn’t doubt that there are some imperfections in the car, but what I think we see happening is that consumers still love them,” - Tasha Keeney, Ark Investment Management analyst

Meanwhile, according to Market Screener, analysts are bullish about a number of the Ark Innovation ETF’s main holdings, such as CRISPR and 2U, which both have outperform ratings.

“Everyone talks about the importance of innovation in business, but boutique ETF firm ARK is one of the few shops out there that actually has layered this philosophy into its investment offerings,” Jeff Reeves told Yahoo Finance.

“[It] stands out from typical tech index funds … All [its holdings] are disrupting the old way of doing business -- and as all have thrived, so has ARK in 2020.”