What Is The Average Rate Of Return For ARKK? The Disastrous Performance of Cathie Wood
The Ark Innovation ETF (ARKK) is down over 77% and has lost over $50 billion since it peaked in early 2021. The actively managed ETF owned by Cathie Wood’s Ark Invest distributes its holdings across companies that they label as ‘disruptive innovation’, namely in the field of artificial intelligence, biotechnology, and financial technology. ARKK slowly increased in value from its inception in 2014 until it shot upward in 2020.
However, the performance was not long lived as the price came crashing down in 2021, continuing its decline throughout 2022.
The once high-performing ETF was ranked in 20 worst performing ETFs the past two years, begging the question of what could have caused such a disastrous performance. Technology stocks were on the rise starting around the same time of the Covid-19 pandemic, but began to fall back down in 2021. While tech stocks struggled in general in 2021, ARKK focus on finding the stocks with the highest disruption potential caused them to misfire on almost all of their top holdings.
Cathie Wood’s Ark Innovation ETF consists of holdings of technology companies that Ark Invest predicts will be the largest market disruptors. The ETF that was established in 2014 saw gradual returns in its first 6 years and began to drastically outperform the S&P 500 in 2016. ARKK generated positive returns for the next four years when the Covid-19 pandemic hit which had a massive effect on the US stock market. High investor sentiment to invest in technology combined with federal funding and historically low interest rates brewed a perfect storm for the technology-based ETF to soar, pulled up by stocks such as Zoom, Roku, and Block.
Venture capital invested over $130 billion in 2020. A 14% increase from 2019. While the number of deals fell by 9% meaning that more money became pumped into fewer companies. ARKK bought many of these companies’ stocks with inflated valuations that carried over into 2021, when interest rates eventually shot back up and rampant inflation devalued the promise of high revenue.
The Ark Innovation ETF is composed of the stocks that inflated and fell the most within the 2 year time frame beginning in early 2020.
ARKK and S&P 500 via Yahoo Finance:
Another reason for ARKK’s extreme losses is its concentration in a relatively low number of stocks. Over 60% of the ETF’s total investments lay in its top ten holdings, more than double that of the S&P 500. Ark Invest’’s entire strategy of investing in one particular field in companies deemed as “disruptive innovation” is the opposite of most major ETFs’ diversified portfolios. Holdings with extremely high volatility such as ARKK can lead to massive profits but can just as well bring about extreme losses. Ark Innovation takes on great risk by concentrating their holdings within a few companies in a few industries and suffered the consequences that firms work hard to negate.
Lastly, ARKK has simply not chosen the best stocks!
One of its major holdings, Tesla, though the highest valued car company by a factor of 2, is in one of the most competitive markets with similar self-driving car companies on the rise. Roku, one of its other major holdings, is competing with industry giants such as Google and Amazon in the hyper-competitive digital streaming market that has a high potential to become beat out. The ETF’s second largest investment is in Zoom, an explosive stock during the pandemic, but with in-person work back on the rise the stock’s golden days may be in the past. Ark has not only chosen a risky game to play by concentrating in few disruptive tech stocks, but have not even chosen their holdings well.
The combination of the Covid-19 bubble bursting, high concentration in few stocks, and poor holdings decision has led to the catastrophic performance of ARKK. Some may say it will be a good long term holding, but the ETF has not proven to be successful in today’s market.
Written by Ben Stewart