In today’s Exponential Investor

  • This ARK isn’t floating
  • Blow off tops
  • Be more Wood

It’s arguably the world’s most famous ETF. And over the last (almost) year it has lost 47% off its net asset value.

It is ARK Invest’s ARK Innovation ETF (ARKK) run by the company’s high profile CEO and CIO (chief investment officer), Cathie Wood.

The rise in profile of Wood and her ARKK fund has been due to the exceptional performance the fund has had since inception at the end of October 2014. Averaging out at 29.66% per annum (cumulative 504%) it’s been one of the best performing ETFs on the market.

There’s a good reason for that, however.

Catching a rising tide

The ARKK ETF holds 44 different stocks at the time of writing.

The smallest holding is in Iovance Biotherapeutics (IOVA). ARKK holds a mere $3.08 million in IOVA.

Up top, representing 8.37% of the entire fund is Tesla (TSLA) of which ARKK holds $1.2 billion worth.

Then it’s a roll call of the best performing tech stocks over the last five years or so…

Zoom Video Communications, Teladoc, Spotify, Shopify, Palantir, Roblox, DocuSign and more.

These were the darlings of the market, right up until last year.

For example, in early 2018, DocuSign stock was trading around $39. By mid-last year it hit a high of $314. At the time of writing, it has shed 57% to trade around $135.

Early 2018 you could get Teladoc stock for about $33. About this time last year, it hit a high of $308. At the time of writing, it’s down 73% to $82.

The of course, there’s Zoom. It’s ARKK’s second biggest holding at around $877 million. In early 2019 Zoom was around $62. On 19 October 2020 it topped out at $588. At $170 today, it’s now 71% off its top.

So it shouldn’t come as a great surprise that the ARKK fund rode all those huge rises from 2017, 2018 and 2019 (actually longer as the fund has been around a while).

Buying in at the top

It remains to be seen how Cathie Wood is seen in the mainstream and financial media given the performance of the ARKK fund over the last year, during which the fund has hit hard times.

By early 2021 the ARKK fund had a share price of over $156. Today it’s around $84. In other words, the value of an investment in ARKK has fallen by almost half.

Now a 46% drop is pretty hard to stomach. It’s better than, say, a 72% fall, but it’s still not what you want to see as an investor.

Furthermore, as is the case with many big successful investments, investors actually didn’t come to the fund until the bulk of the big wins have already been made.

Sure, DocuSign is about three-times higher now than in 2018. Teladoc and Zoom have still more than doubled over the last few years. But most investors only came to these stocks through the ARKK fund in 2020. They bought in at the top.

But the question is, if you have the ARKK fund, do you hold on for dear life, or do you get out? And if you’re now looking at it, do you dive in, or hold off on more potential pain to come?

Be Cathie Wood (before the fall)

The biggest question you face investing in tech right now, and even considering a fund like ARKK, is what is going to happen to tech stocks over the next year?

Many of them aren’t profitable. Many of them have seen price falls of 50%, 60%, 70% and more.

Why is that? Did they reach obscene valuations last year? Were they overpriced in an overexuberant market? Is the market now pricing them fairly, appropriately?

Or does a company like Teladoc with a $13 billion valuation still overpriced? Is Zoom at $51 billion also still overpriced?

In my view, to understand the value in an ETF like ARKK you need to pick through its holdings and assess each of the holdings.

Do what Cathie Wood would do. If, on balance, the stock looks like it’s heading south, there’s your answer. If, on balance, the stock looks to be promising still but in the midst of a correction, there’s another answer for you.

Furthermore, consider some of the kinds of companies not in the ARKK ETF that might be added at lower and potentially more exciting valuations than the current crop of holdings.

Yes, it’s a lot of work, but it’s worth it.

As we explained in yesterday’s edition of Exponential Investor, the recently (5 January) released minutes from the Federal Open Market Committee’s meeting on 14-15 December clearly shows that monetary policy will be tightened in the United States.

Cheap money will still be cheap, but not as cheap as it’s been. Companies that have been consistently propped up by this cheap money might be paying more for it or might not get access to it at all. The rise in the cost of capital could hit some of the US tech stocks hard.

The solid companies that are still innovative and progressive yet financially sound might become the “new” darlings of ARKK. These could be situations where there has been just a short-term correction in price but the longer term theme(s) is/are still valid for the underlying businesses.

It’s hard to tell. But here’s what I’d do. Once you make up your mind as to whether you get into the ARKK fund or out of it, take a measured approach.

Trying to know exactly how the market will behave from here is very hard. Indeed, it is impossible to predict accurately.

So don’t even try. Drip feed in or out of the investment. Don’t lump it all in with one hit: otherwise you’re tied to that point of timing. By dollar-cost-averaging in (or out) you can help smooth that volatility.

Maybe ARKK turns back higher, and you’re the beneficiary. Or you incrementally lower your cost base as it heads lower.

All you really need to decide from all this is what your long view of innovation and technology will be. Is it going backwards, are we going to regress back a decade? Or will it continue to proliferate, expand, grow and consume our daily lives?

Until next time…

Sam Volkering
Editor, Exponential Investor