ARK in a Bear Market: Buy the Disruptive Innovation Dip?

Cathie Wood will be feeling the heat as her wildly successful ARK Innovation ETF extends its year-long rough patch. Is it time to BTD?

What’s happening to ARK?

In the first week of December, the The ARK Innovation ETF posted its worst week since February, getting hammered by nearly 13% to the lowest in more than a year.

The low of 89.03 this month marked a decline of more than 44% from its record high of 159.70 reached in February. Year-to-date the fund is down more than 20%.

ARKK 2-year chart

 

The 20% drawdown line demarking a bear market acted as resistance for most of 2021. After breaking below a rising trendline, the price fell more than 40% from its peak in February. The 40% drawdown line has acted as support. Should it give way, the 50% drawdown level around $80 could be next support.

All of the ARK funds have been going through a rough patch since peaking in February. All (except for the ARK Autonomous Technology & Robotics ETF (ARKQ)) are in negative territory for the year. As a reminder, the S&P 500 has risen 25% this year.

Since all the funds revolve around the same general theme of ‘disruptive innovation’ and involve Cathie Wood’s trading strategy of buying weakness and selling strength - the performance correlation is unsurprising - afterall, in 2020 they were all rising.

Why are the ARK funds doing so poorly?

Downtown Josh Brown recently described ARK on CNBC as “being the most despised corner of the market right now after having been the most loved part of the market a year ago.” 

 

 

That succinct description explains a lot the underperformance of the ARK funds - the huge gains of 2020 could not be sustained indefinitely and some ‘give back’ was always going to be necessary as investors rotated into other parts of the market with more upside potential. 

The Research Team at FlowBank has been talking about the ‘Great Rotation’ from growth to value since the start of 2021 and although it has gone through fits and starts (like the rise in bond yields) and with some notable exceptions like Apple and Microsoft - it has pretty clearly happened. The capital needed to power bank stocks, energy stocks and other cyclical sectors of the market this year came from the kind of high tech growth stocks featured in ARK.

From bad to worse thanks to the Fed

Folded into why this rotation was happening was the big theme for markets in 2021, which was ‘the reopening’. Top holdings like Teladoc and Zoom were top beneficiaries from lockdowns and top losers from the reopening.

More recently, the pain for ARK bulls has been extenuated as central bank policymakers signaled a more hawkish monetary stance and readied markets for higher interest rates next year. Higher interest rates typically have the effect of lowering P/E multiples in the stock market - so those stocks with the highest PE ratios (i.e. disruptive innovation tech stocks) have been hit the hardest. 

Buy the dip in ARK?

Arguments for:

  • Ignore valuation. Valuation has never been a reason to own ARK funds - these funds are buying companies with platforms and network effects that will take years to ever manifest into real profits.
  • Be a contrarian. If you believe that the products and services offered by the stocks held by ARK will disrupt existing players and eventually dominate industries, then you now have a 40% discount at which to take part.

Arguments against:

  • Inflation. Some forecasters are beginning to argue that the ‘deflationary’ market environment of the past 30 years has changed. This means the way the market behaves will change - with implications for the yield equities offer over bonds and the decades-long love affair with tech stocks.
  • A falling knife. After a rapid uptrend in 2020, the fresh lows in late 2021 would imply the price is moving out of a consolidation and into a new downtrend.

ARKK Holdings

The ARK Innovation ETF (ARKK) currently holds 25 stocks, as of October 31 2021. If there are some you like and some you don’t, all of these stocks are available to trade using the FlowBank investing app.

 

COMPANY

SYMBOL

TOTAL NET ASSETS

Tesla Inc.

TSLA

11.20%

Teladoc Health Inc.

TDOC

6.86%

Coinbase Global Inc.

COIN

5.90%

Unity Software Inc.

U

5.26%

Roku Inc. Cl A

ROKU

5.08%

Zoom Video Communications Inc.

ZM

4.36%

Spotify Technology S.A.

SPOT

4.17%

Block Inc.

SQ

3.80%

Shopify Inc. Cl A

SHOP

3.53%

Zillow Group Inc. Cl C

Z

3.30%

Exact Sciences Corp.

EXAS

2.96%

UiPath Inc.

PATH

2.92%

Twilio Inc. Cl A

TWLO

2.90%

Palantir Technologies Inc.

PLTR

2.88%

Intellia Therapeutics Inc.

NTLA

2.84%

Twitter Inc.

TWTR

2.53%

CRISPR Therapeutics AG

CRSP

2.53%

DraftKings Inc. Cl A

DKNG

2.37%

Beam Therapeutics Inc.

BEAM

2.32%

Invitae Corp.

NVTA

1.94%

10x Genomics Inc.

TXG

1.59%

DocuSign Inc.

DOCU

1.54%

Fate Therapeutics Inc.

FATE

1.54%

Robinhood Markets Inc.

HOOD

1.44%

PagerDuty Inc.

PD

1.34%

Source: MarketWatch

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