Cathie Wood, chief executive officer and chief investment officer of ARK Investment Managemen.
The widely popular
ARK Innovation exchange-traded fund
has hit a new low for 2021. After peaking on Feb. 12, the fund—known for its heavy bets on disruptive companies like
—plunged 35% from that high as of Wednesday.
Led by star manager Cathie Wood, ARK Innovation (ticker: ARKK) delivered blockbuster gains in 2020 with a whopping 153% total return. The fund was one of the top three best-performing ETFs last year. Billions of dollars have flooded into the fund on its way up, boosting its total asset of management, at the February peak, to $28 billion.
The story line has somewhat reversed over the past few months. With inflation and rising interest rates on investors’ minds, the highflying growth names in ARK Innovation have started to come back down to Earth. About 90% of the fund’s holdings are in negative territory for the year. Tesla (TSLA), its largest holding with 10% weight, was down nearly 16% year to date.
Many of ARK Innovation’s investors have stuck with the fund despite recent losses. After all, the ETF is up by more than 80% over the past 12 months.
But those that came to the fund more recently might not be so lucky. ARK Innovation is currently trading at $102 per share, around the same level it was in mid-November last year. Roughly 55% of the fund’s total lifetime flows happened since November, according to
senior ETF analyst for Bloomberg Intelligence.
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Even those investors in the red seem to be sitting on the fund, likely hoping for a rebound in the coming months or years. Since ARK Innovation started tumbling in February, the fund has seen $1.7 billion in net asset inflows, meaning there has been more buying than selling.
To be sure, selling activities have been stronger in the past 30 days, as ARK Innovation saw about $700 million in net outflows. That’s about 3% of the ETF’s nearly $20 billion of assets. Even so, investors bought the decline on Monday when ARK Innovation fell 30% below its peak, adding another $373 million to the fund.
There has been much debate about whether innovative stocks such as the ones ARK invests in will see a temporary drawback or be unseated entirely. Many ARK investors seem to still have faith, but it’s unclear how long they will hold if the fund continues to fall.
If avalanche outflows come, the fund could face a serious liquidity problem. Along with other ARK funds, ARK Innovation now has significant ownership in a group of smaller-size, thinly-traded firms. If it’s forced to sell a large number of shares in those stocks without enough buyers on the other side, it can be a costly trade for the fund and its investors.
To avoid that from happening, the fund might need to invest in larger, more liquid stocks. In a previous interview with Barron’s, Wood said investment capacity shouldn’t be a challenge for ARK if its holdings are truly on exponential growth trajectories. The explosion of newly public companies over the past year—especially those listed through special-purpose acquisition companies, or SPACs—have also provided ample new opportunities for stock pickers, which could mitigate concentrated ownership, she said.