Cathie Wood’s flagship Ark Innovation fund had a tough March after a scintillating spell for the once high-flying exchange-traded fund, but there could be more heart-wrenching volatility in store for ETFs, according to at least one analyst. which warns investors.
Morningstar’s Robby Greengold launched the Ark Innovation ARKK ETF,
to a “neutral” rating, but describes the potential pitfalls for Wood’s popular ETF in unflattering terms in a Wednesday research report, describing the Ark Investment Management team as an “inexperienced team” with “risk controls” lax ”making the unit“ ill-prepared to face a major plot twist. “
Greengold says Ark Innovation’s portfolio “has become less liquid and more vulnerable to severe losses as its size has grown.”
Indeed, the ETF has suffered a dizzying decline in recent weeks, which pushed it down 23% from its recent February 15 high of $ 156.58, according to FactSet data, which equates to the widely used definition of a bear market. The fund had managed around $ 23 billion near its peak.
A sharp rise in bond yields, in particular on the yield on 10-year Treasury bills of reference TMUBMUSD10Y,
on the back of fears of the possibility of spike in inflation, fueled by a $ 1.9 trillion COVID budget package and potentially billions more in infrastructure spending proposed by President Joe Biden, did give rise to the hope of a more marked rebound in the viral pandemic.
This in turn raised benchmark borrowing costs, with the 10-year Treasury experiencing its biggest price drop since 2016 and, as a result, its biggest rise in yields.
Higher borrowing costs weighed on some of the speculative investment bets backed by Wood’s team.
Greengold says Ark Innovation’s composition of small businesses makes it more vulnerable to higher bond yields. The Morningstar analyst puts it this way:
It has retained and increased its stakes in small companies which are now much more difficult to sell without significant impact on their share prices. Across all US domiciled funds, the ETF stood out in February for having the most concentration in companies in which it held 10% or more free float shares, which doesn’t even include vehicles. additional strategy-related, which combined represent one another. $ 15 billion.
The analyst adds:
But ARK’s inexperienced team of analysts, the right risk management approach for you, and the bloated asset base raise doubts whether this fund will continue to perform well historically.
Wood and Ark Innovation has drawn inordinate attention as the investor is seen as a disruptor in investment circles, with the flagship fund posting a 174% gain despite its recent collapse.
However, the risks and volatility associated with its heavy tech investment strategy, which bullishly embraces EV companies like Tesla Inc. TSLA,
and digital assets like bitcoin BTCUSD,
has started to raise concerns as investors worry about rising yields and ditch pandemic highfliers for companies that have been left behind and may perform better as the economy opens up.
Wood started ARK Investment about seven years ago and this year was named one of Barron’s 100 Most Influential Women in American Finance. But Morningstar seems to think the future path to earnings for Wood’s funds will be much more difficult.
Ark Innovation is now down 3.4% so far in 2021, which puts it behind the nearly 125-year-old Dow Jones Industrial Average DJIA,
up 8% and the S&P 500 SPX,
which is up over 6% so far in 2021. The Russell 2000 RUT Small Cap Index,
Meanwhile, filled with value-driven companies, is up more than 13% year-to-date, while the growth index Nasdaq Composite Index COMP,
shows a return of only 3.2% since the start of the year.
Discover: Opinion: Why ARK Innovation’s searing returns aren’t as impressive as they seem
In recent talks, Wood said the widening of the rally from stocks to value stocks and rising interest rates would create turbulence in the short term but would benefit the investment firm in the long term.
A call to Ark Investment’s office for comment was not immediately returned.