ARK Innovation ETF: after its 70% crash, should I buy?

After almost 13 years of good times, the past six months have been brutal for investors in US tech stocks. The tech-heavy Nasdaq Composite index hit its all-time high of 16,212.23 points on 22 November 2021. Nearly six months later, the index stands at 12,317.69 points, down 24%. And this collapse in tech stocks has hammered shares in Cathie Wood’s ARK Innovation ETF (NYSEMKT: ARKK).

ARK Innovation ETF: superstar fund

Cathie Wood launched the ARK Innovation ETF — her flagship exchange-traded fund — on 30 October 2014. This New York-listed fund invests in what Wood calls “disruptive innovation“. These high-tech fields include DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech.

From its launch until 2016, returns were fairly pedestrian. But then the shares skyrocketed by 84.9% in 2017 and leapt 34.6% in 2019. But the best was yet to come. During Covid-stricken 2020, the shares soared by an astonishing 149.1%. This earned Cathie Wood the nickname of ‘The Queen of the Bull Market’. But shares in her super-fund were peaking and set to sink.

ARK sinks

At its all-time high, the ARK Innovation ETF’s share price peaked at $159.70 in February 2021. But then the stock came crashing back to earth. On Thursday, it closed at $47.75, down $4.68 (-8.9%) in a single day. This leaves this one-time wonder-stock down 70.1% from its record high. I feel it also leaves Cathie Wood’s reputation weakened (for now).

Furthermore, here’s how the ARK Innovation ETF’s share price has performed over six other timescales.

Five days	-1.8%
One month	-24.7%
Year to date	-49.5%
Six months	-61.3%
One year	-55.9%
Five years	78.8%

As you can see, owning the stock has been a disaster over periods ranging from one month to one year. However, over five years, shares in the ARK Innovation ETF have risen by nearly 79%. This means Cathie Wood’s fund has narrowly outperformed the S&P 500 index, which gained 73.4% over the same period, all excluding dividends.

From star to dog

Summing up, Cathie Wood made her name by thrashing the wider market in three key years: 2017, 2019, and 2020. But she has since fallen foul of what I call ‘Sirius syndrome’ (Sirius is also known as the Dog Star). Many star funds — and fund managers — eventually go on to become dogs. Likewise, some dog funds (and their managers) go on to become stars.

This is an almost inevitable outcome, thanks to two powerful factors: the first is reversion to the mean, and the second is style rotation (often between growth and value stocks). During the pandemic panic, Cathie Wood’s high-risk, high-return strategy worked a treat. But in this new era of red-hot inflation and rising interest rates, investors are flocking to the safety of low-priced value shares.

Would I buy ARK Innovation today?

At its 2022 low, the ARKK share price hit $45.89. It’s currently 4.1% above this. But this stock is hugely volatile, spiking up/down 10% in 24 hours during 4-5 May. As a veteran value investor, this kind of stock (high risk, high valuation and high volatility) is the exact opposite of what I want to own. Hence, I won’t buy ARKK right now. However, if or when US tech stocks stage another recovery, then the shares could soar skywards once again!

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has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.