Catherine Wood (Trades, Portfolio)'s ARK Investment Management has built a stable of exchange-traded funds covering virtually all of the market’s current favorite flavors of disruptive innovation. ARK Innovation ETF (ARKK, Financial), its flagship fund, helped put the firm on the map thanks to the exceptional performance of its portfolio of eye-catching, growth tech stocks throughout 2020. A year later, however, things look rather different for the high-flying ETF.
From record run to rapid reversal
With an average annualized return of 39% from its launch in October 2014 to January 2021, ARK Innovation’s overall returns looked mighty impressive compared to those of the S&P 500 index. 2020 proved especially good for ARK Innovation, returning more than 150% for the year. However, as Morningstar reported on Nov. 30, the popular ETF has experienced a rather spectacular reversal of fortune this year:
“ARKK has lost 14.11% year to date as of Nov. 29, 2021, more than 33 percentage points below its Morningstar Category benchmark, the Morningstar Mid Growth Index. The fund’s poor performance has landed it in the bottom 1% of its category.”
ARK Innovation has continued to drop since then. As of Dec. 3, it is now down 25% for the year. The return of market volatility has not helped. As Kiplinger reported on Nov. 13, investor fear has been mounting in the face of an increasingly volatile and uncertain market environment. Many investors lulled by the summer’s smooth ride have suffered something of a rude awakening.
Follow the fund flows
ARK Innovation’s outstanding performance last year was rewarded, perhaps unsurprisingly, by a flood of capital inflows during 2020 and early 2021. The resultant massive expansion of assets under management meant that ARK Innovation had a record amount of capital at risk, as TheStreet observed on Dec. 2:
“Based on past performance and when the money poured in, it's estimated that more than half of ARK ETF assets are currently underwater. Among purely thematic ETFs, ARK has the top 5 largest outflows over the past month.”
The performance chasers who poured cash into ARK Innovation at its height did not benefit from the prior years of outperformance. Thus, a huge amount of capital has been put at risk by the ETF’s reversal this year. Keubiko, a widely followed analyst and market commentator, has spent the last year tracking ARK Innovation’s cumulative dollar return alongside its cumulative investment flows. As of his Dec. 1 update, ARK Innovation’s cumulative dollar return has fallen almost to zero.
ARK Innovation’s lackluster 2021 has erased nearly all of the returns – in dollar terms – of the past seven years.
My take
ARK Innovation ETF’s troubles have intensified markedly since the summer. With 2021 drawing to a close, I see little hope of an eleventh-hour turnaround. Investors in search of an undervalued innovation play might be better served looking elsewhere.
