Cathie Wood’s flagship Ark Innovation fund has had a rough March after a scintillating stretch for the once-highflying exchange-traded fund, but there may be more gut-wrenching volatility in store for ETF, according to at least one analyst, who cautions investors.
Morningstar’s Robby Greengold has initiated the Ark Innovation ETF ARKK, +4.74% at 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 crew, as an “inexperienced team” with “lax risk controls” making the unit “ill-prepared to grapple with a major plot twist.”
Greengold says that Ark Innovation’s portfolio “has become less liquid and more vulnerable to severe losses as its size has swelled.”
Indeed, the ETF has suffered a dizzying decline in recent weeks which has it down 23% from its recent peak put in on Feb. 15 at $156.58, FactSet data show, which meets the widely used definition for a bear market. The fund had managed around $23 billion near its peak.
A big rise in bond yields, especially in notably the benchmark 10-year Treasury note yield TMUBMUSD10Y, 1.740%, on the back of fears of the possibility of surging inflation, powered by a $1.9 trillion COVID fiscal package and potentially trillions more in infrastructure spending proposed by President Joe Biden, has raised hopes of a sharper rebound from the viral pandemic.
That in turn has lifted benchmark borrowing costs, with the 10-year Treasury seeing its sharpest selloff in prices since 2016, and commensurately its sharpest rally in yields.
Higher borrowing costs have weighed on some of the speculative investment wagers that Wood’s team has supported.
Greengold says Ark Innovation’s composition of smaller companies make it more vulnerable to higher bond yields. The Morningstar analyst puts it this way:
It has retained and grown its stakes in small companies that are now much more difficult to sell without materially impacting their stock prices. Across all U.S.-domiciled funds, the ETF stood out in February for having the most concentration in companies in which it owned 10% or more of floating shares—that doesn’t even include additional vehicles tied to the strategy, which combined amount to another $15 billion.
The analyst adds:
But ARK’s team of inexperienced analysts, go-with-your-gut risk management approach, and bloated asset base raise doubts about whether this fund’s outstanding historical results can continue.
Wood and Ark Innovation have drawn outsize attention because the investor is seen as a disrupter in investing circles, with the flagship fund boasting a 174% gain, despite its recent slump.
However, the risks and volatility associated with its heavy-technology investment strategy, which bullishly embraces electrric-vehicle companies like Tesla Inc. TSLA, +5.08% and digital assets like bitcoin BTCUSD, -0.09%, has begun to raise concerns as investors fret about the rising yields and shift out of pandemic highfliers to those companies that have been left behind and may perform better as the economy opens up.
Wood kicked off ARK Investment about seven years ago and earned her way onto Barron’s 100 Most Influential Women in U.S. Finance this year. But Morningstar seems to think the future pathway to gains for Wood’s funds will be much tougher.
Ark Innovation now stands down 3.4% so far in 2021, which puts it as a laggard against the almost 125-year old Dow Jones Industrial Average DJIA, -0.26%, up 8% and the S&P 500 index SPX, +0.36% which is up over 6% so far in 2021. The small-capitalization Russell 2000 index RUT, +1.13%, meanwhile, filled with value-oriented companies, is up with over 13% in the year to date, while the growthy Nasdaq Composite Index COMP, +1.54% boasts a mere 3.2% year-to-date return.
Check out: Opinion: Why ARK Innovation’s red-hot returns aren’t as impressive as they seem
In recent interviews, Wood has said that the broadening of the rally in stocks to value names and rising interest rates would create turbulence in the short-term but be good for the investment company over the longer term.
A call to Ark Investment’s office for comment wasn’t immediately returned.