One of the hottest ETFs pulls back again, and the selloff could only get worse.
ETF (ticker: ARKK) produced a return of 153% in 2020. But it is now abandoning those gains quickly. The ETF, which is actively managed by Cathie Wood, CEO of ARK Invest, and his team, is down 27% in the past three months, including a 13% drop last week alone. It was down again on Thursday, down 2.6% to $ 108.62 at 11:56 a.m.
The top 10 holdings of the fund represent almost half of the portfolio.
(TSLA) is its first stake with around 11% of the assets, followed by
(SQ) at 6.5%,
(TDOC) at 6.3%, and
(ROKU) at 5.5%. The rest of his top 10 consists of
Focus on video communications
Many of these stocks fell as market leadership shifted from high growth stocks with multiples to value and cyclical stocks. While the ETF offers exposure to many innovative technological areas that can be great long-term bets, it suffers as investor appetite for risk cools and crowded trading reverses.
Tesla, for example, is down 22% in the past three months. Zoom, Zillow, and Baidu are around 30%. Spotify and Exact Sciences are each down 25%. Teladoc is also pulling the portfolio down, losing 47% in the past three months, including a 21% drop since April 26.
The ETF is still a giant with $ 21 billion in assets, making it one of the largest actively managed ETFs. But he gets rid of assets quickly; Investors repurchased $ 770 million in shares last week and a total of $ 866 million last month, according to FactSet.
Buybacks can add selling pressure to some small and mid-cap ETF stocks, although it is unlikely to have much of an impact on mega-caps like Tesla or Baidu.
Investors who have bought in recent months are at risk of heavy losses. The majority of ETF entries have taken place within the past 9 months, according to the Bear Traps report. This implies that 50% of the ETF’s money is now underwater, according to the report.
“With more than half of the entries losing money, that means a growing number of investors are cutting their losses,” according to the report. “Meanwhile, we learn that ARKK is no longer available for (short-term) borrowing from Interactive Brokers.”
Technical indicators don’t look good either. The ETF saw a “very bearish close” on Wednesday, Bear Traps said, and broke its 200-day moving average Thursday morning for the first time in over a year. Falling below that level implies that “significant sales” could still occur, according to Bear Traps.
Some analysts have criticized the fund. CFRA downgraded its ETF rating from five stars to two stars on April 30.
“A two star for us means it’s less likely to outperform over the next 9 months,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA. The price of the underlying portfolio has risen so much that it is now much less attractive, he says. And the ETF’s fees, charging 0.75% in an expense ratio, coupled with its average risk / return, made it less attractive.
Morningstar analyst Robby Greengold is also bearish. The ETF “favors companies that are often unprofitable, highly volatile and could fall in tandem,” he wrote in a report. Wood’s investing style views risk through the prism of bottom-up stock selection, rather than trying to simulate the risk exposure of the entire portfolio under various market conditions, he adds. . And as the ETF’s asset base grew, “the fund became less liquid and more vulnerable to serious losses.”
Admittedly, the ETF’s track record remains incredible, at least for those investors who have caught the wave on the way up. From its October 2014 launch to February 2021, the ETF’s 36% annualized return beat all other actively managed ETFs in the medium growth category, according to Morningstar. It also outperformed the Russell Midcap Growth Index by 15% and
Gain de 19%.
But catching the ETF at the right time has been crucial. Most of its outperformance occurred in 2017 and 2020, according to Morningstar, but it lagged its category in 2015 and underperformed indices and peers in market corrections.
ARK Invest did not immediately respond to a request for comment.
Write to Daren Fonda at [email protected]