Cathie Wood’s ARK stays the course and relies heavily on innovation
Cathie Wood’s ARK Investment Management LLC is grabbing more shares of largely unprofitable companies, doubling down on a bet that many traders and investors expect to see tested this year by rising interest rates .
Over the past two weeks, Ms. Wood’s flagship product, ARK Innovation ARKK -2.52%
an exchange-traded fund bought more than $400 million in high-growth stocks, including Roblox Corp.
To block Inc.
and Robinhood Markets Inc.
That’s according to the company’s daily trading logs and stock price data as of Friday. She says the companies, which span video games, digital payments, commerce and other industries, have the potential to change the world.
Shares of Roblox, Block and Robinhood were down at least 25% each in the first six weeks of the year. More than half of all stocks in the ETF, which bears the symbol ARKK, are down 20% or more in 2022, according to FactSet.
ARK has been among the big winners in the pandemic era, which has been characterized by big gains in stocks of many unprofitable companies and cryptocurrencies, such as bitcoin, due to high interest rates. lows and broad stimulus measures. Investors in these assets now face a rising interest rate environment that will be far less forgiving to unprofitable companies or those trading at high valuations.
That doesn’t bode well for Ms. Wood and her ARK funds, analysts said. When rates are low, companies are often free to spend more to invest in their business and reduce the amount they spend on debt servicing. Higher rates increase borrowing costs and potentially delay profitability.
“Aggressive growth stocks are naturally at a disadvantage when rates rise,” said Morningstar analyst Robby Greengold.
The ARK Innovation ETF is down 24% this year, matching its decline in 2021. The fund has lagged the broader stock market, which has also come under pressure. The S&P 500 and Nasdaq Composite fell 7.3% and 12% respectively in 2022 after posting double-digit increases last year.
ARK has largely stuck to its strategy of buying and owning stocks of companies that it believes offer the greatest potential for change and innovation. You’re here Inc.,
and Health Teladoc Inc.
were the innovation fund’s top three holdings on Friday. It’s similar to early 2021, when Tesla, Roku and Block were the top three, with Teladoc coming fifth.
Tesla, Roku and Teladoc are all down at least 19% in 2022, partially reversing big gains in 2020 when the pandemic turned them into stock market darlings.
There have also been some changes to the innovation fund. Zillow Group Inc.,
for example, was a top 10 holding last year and ARK has frequently added to its position. He finally offloaded the shares last fall after the company said it was exiting the home-buying space following substantial losses.
A spokesperson for ARK referred to recent videos of Ms. Wood highlighting company strategy and market conditions.
“Today, we still see things very differently from many others, especially when it comes to inflation and interest rates and, most importantly, innovation,” Ms Wood said in a video to the audience. investors this month.
Ms Wood added that a rise in treasury yields to 3% would be more of a problem for mature growth companies facing stiffer competition than for the “super growth companies” she favours. She compared the situation to the early 2000s, saying Amazon.com Inc.
managed to achieve double-digit annual revenue growth.
“You would have bought this stock all day as a value investor,” Ms. Wood said. “And of course the returns would have been phenomenal. We’re in the same place with truly emerging growth right now.
Ms Wood’s message appears to be winning over some supporters. ARKK received $350.8 million in net inflows over the past week, including more than $300 million on Thursday, its biggest one-day inflow since June, according to FactSet.
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But Mrs. Wood’s critics remain.
Bearish bets against ARKK represent almost 16% of the fund’s shares, according to data from S3 Partners. That’s down from a peak of 17.3% in mid-January, but well above levels over most of the fund’s life.
Additionally, an ETF designed to track the inverse of ARKK’s performance, the Tuttle Capital Short Innovation ETF, has received net inflows of almost $200 million from investors so far this year, driving assets at $309.8 million, according to FactSet data. The ETF, which bears the symbol SARK, is up 24% in 2022.
“There’s a demand out there to be short ARKK,” said Matthew Tuttle, managing director of Tuttle Capital. “We see this as a better way to hedge your portfolio.”
Ms Wood called the rollout of ETFs such as SARK “interesting” in her video before reiterating her view that the disruptions should not be underestimated.
“I think history tells us not to bet against innovation,” she said.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
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