Catherine Wood (Trades, Portfolio) is the founder and chief investment officer at Ark Invest. She believes innovation is the key to growth, and her growth strategy was wildly successful in 2020 and the early months of 2021.
However, her selection of active ETFs have achieved underperformance in the later part of 2021 and 2022. Recently, Ark Invest released a statement which revealed its latest Transparency ETF (CTRU) will close at the end of July, just eight months after launching. This was the first ever ETF closure by the fund and came after Transparency Global announced they will stop calculating the Transparency Index, which focuses on ESG. Therefore, Wood decided to close this ETF, and its board of trustees approved the decision, as stated in a recent filing with the SEC. For existing shareholders in the fund, a redemption can be requested before July 26, when it officially closes.
Although the recent ETF closure was explained as more of a technical issue with the index it was tracking, it does beg the question of whether this is the beginning of the end for Ark Invest. Given the butchering Ark’s ETFs have taken since the growth stock market began cooling down, many investors have been wondering if the firm would eventually close its doors, signaling the end of hope for this particular sector of the market to recover quickly.
Ark’s flagship fund, the Ark Innovation ETF (ARKK, Financial), is down an eye-watering 69% from its highs in February 2021.
The three largest holdings in ARKK are Zoom (8.41%), Roku (8.05%) and Tesla (8.02%). These are all stocks which had major bull runs in 2020 but a declining share price since the fourth quarter of 2021.
Ark Invest's Fintech Innovation ETF (ARKF) has the top three holdings of Block (SQ) (9.94%), Shopify(SHOP) (9.7%) and Coinbase (COIN) (8.38%). These are all stocks which have had their share price decimated over the past year. Ark's other ETFs have all seen poor performance since March 2021.
Ark Invest's ETFs had a tremendous bull run in 2020 and achieved gains of over 152%. This was driven by the low interest rate environment and a heap of monetary stimulus, which favors high multiple growth stocks such as Tesla (TSLA), which was the largest position in many of Ark's funds, including the flagship ARKK.
However, when high inflation numbers began to show up in March 2021, and when the market began to realize that many "Covid stocks" would see their pandemic boosts drop off soon, the fund saw billions of dollars in outflows as investors transitioned out of growth and into value.
Initially, this was seen as a “buy the dip” opportunity by many investors. However, that “dip” kept dipping, and in the end it was like trying to catch a falling knife as inflation and interest rates have continued to rise.
The good news is, Statista forecasts inflation to dip back to more manageable levels of approximately 2.86% in 2023, then decline to 2% (which is the Fed's target) in the years following.
A change in the inflation environment is expected to favor Ark Invest, and the fund even received inflows of $658 million in May, bringing the total to $1.5 billion for 2022. In addition, Wood has reiterated they have a “five year time horizon” for all investments. ARKK has an annualized five-year return of 8.29%, and in all fairness, the results were incredibly skewed by the 2022 market bubble and subsequent collapse.
Ark’s ETFs have seen a boost in the past couple of months, and ARKK’s share price is up by 31% from lows.
Wood's weekly videos and social media updates also keep retail investors engaged and help to boost inflows for the fund, or at least encourage investors to hold. In a prior interview, Wood stated her usage of social media and traditional media outlets was a major key to Ark Invest's early success.
When all is said, Ark Invest is a growth stock investing firm, and thus its investments are naturally going to reflect that. The current macroeconomic situation has caused tremendous underperformance in growth stocks since March 2021. However, more recently, Ark's funds have seen inflows and an uptick in share prices.
I don’t believe this is the end for Ark Invest any more than it is the end for growth stocks. Nobody can doubt that investing into innovation is a strong thesis, and once the market begins to turn towards growth again, I expect Ark Invest to recover as well.
