Ark Invest’s flagship fund, the ARK Innovation ETF [ARKK], has sprung several leaks in recent weeks, battered by investors’ nerves over the future direction of highly valued tech stocks.
The ARKK ETF had a spectacular 2020, rocketing 358.6% from $34.14 at close on 18 March last year to $156.58 at close on 12 February 2021.
Its performance was driven by demand for new digital and cloud technology as businesses and society navigated through the pandemic.
The fund’s top holdings reflected common concerns and experiences during lockdown. Electric vehicle (EV) maker Tesla [TSLA] was boosted by people looking for less polluting forms of transport while Teladoc Health [TDOC] benefited from those unable to get to GP surgeries. Zoom [ZM] was lifted by the rise in video communications, both for work and pleasure, and Shopify [SHOP] rode the e-commerce boom.
However, the Ark Innovation ETF began to falter soon after dropping to $99.48 at close on 13 May. Its struggles shadowed those of top holdings like Tesla, whose shares fell from $883.09 at close on 26 January to $563.46 on 19 May as problems, including weaker Chinese sales, hit investor sentiment.
As businesses and society emerged from the coronavirus pandemic, there were also concerns there would be less need for products such as video communications as part of remote working and digital payments.
In addition, ARKK was also the victim of a broad tech market sell-off, given the prospect of rising inflation. Tech stocks’ high valuations are based on future cash-flow prospects. As inflation climbs, the value of these declines.
The ARKK bounced back, hitting $130.78 at close on 30 June, helped by continued uncertainty over the progress of the pandemic and virus variants.
However, investor caution came back with a vengeance earlier this month when regulatory filings showed that famous Big Short trader Michael Burry’s Scion Asset Management had bet against ARKK by holding bearish put options worth nearly $31m against 235,500 shares. By doing so, he hoped to profit from a drop in the ARKK price.
According to the Wall Street Journal, Laurion Capital Management holds $171m-worth of put options against 1.3 million shares of the ARKK ETF, with GoldenTree Asset Management, Moore Capital Management and Cormorant Asset Management also holding “sizable” bearish positions.
Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, said in a Reuters report on 18 August, that about 24.87 million shares — or 13.4% of the ETF’s free float — are currently shorted.
Matthew Tuttle, chief executive of Tuttle Capital Management, who is trying to launch a short ARK ETF to bet against the fund, told MarketWatch: “What Ark has done is almost created a whole new sector. You can think of it as unprofitable tech.”
However, ARK Invest founder Cathie Wood (pictured above) has fought back. She told CNBC’s ‘Tech Check’ programme: “I don’t think we’re in a bubble, which is what I think many bears think we are… I remember the late 1990s, our strategies would have been cheered on. You remember the leapfrogging of analysts making estimates one higher than the other, price targets one higher than the other. We have nothing like that right now. In fact, you see a lot of IPOs or [special purpose acquisition companies] coming out and falling to earth. We couldn’t be further away from a bubble.”
“You remember the leapfrogging of analysts making estimates one higher than the other, price targets one higher than the other. We have nothing like that right now. In fact, you see a lot of IPOs or [special purpose acquisition companies] coming out and falling to earth. We couldn’t be further away from a bubble” - ARK Invest founder Cathie Wood
She also tweeted that Burry did not “understand the fundamentals that are creating explosive growth and investment opportunities in the innovation space.”
“These technologies should transform the world during the next 10 years. If we are correct, GDP and revenue growth will diminish until the opportunities in nascent technologies begin to move macro needles. In this environment, innovation-based strategies should distinguish themselves.”
Even Tuttle concedes there could be life in the ARKK yet. “She [Wood] is saying ‘Hey, where is the future?’… and buying those companies…There are lots of forces in the market that could keep things moving in a [bullish] direction.”
Ben Johnson, director of global exchange-traded fund research for Morningstar, is also cautious about shorting Ark’s fund.
“The odds you’re going to profit from those bearish beliefs by short-selling these funds are pretty small,” Johnson said. “The upside is limited, the best you can get is a 100% return on your investment, and that’s assuming ARK will run its portfolios to the ground, which isn’t going to happen. On the other hand, the worst that could happen is that if Ark has another year like they did last year. You’ll get absolutely torched.”
“The upside is limited, the best you can get is a 100% return on your investment, and that’s assuming ARK will run its portfolios to the ground, which isn’t going to happen. On the other hand, the worst that could happen is that if Ark has another year like they did last year. You’ll get absolutely torched” - Ben Johnson
The ordinary investor still seems keen on hopping on board the ARKK, with nearly $5.9bn inflows this year as of 19 August, according to ETFLogic.
It is hard not to believe in the long-term potential of many of the ARKK top stocks, including Tesla as climate change carbon emission targets loom, and Spotify and Square [SQ] as e-commerce and digital payments soar.
An ETF focused on innovation will, by its nature, have moments of volatility, but over the long-term, its course seems to be set fair.
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