As a veteran investor, I rarely invest in collective funds. Instead, I make my own asset allocation decisions and pick my own stocks. However, since spring 2020, I’ve kept a close eye on one particular US exchange-traded fund (ETF). An ETF is a collective investment with listed shares that trade just like other stocks. This fascinating ETF is the ARK Innovation ETF (NYSE: ARKK), run by Cathie Wood, ARK Investment Management’s star fund manager. But the ARKK share price has taken a nasty turn since mid-February. So, is Cathie Wood’s star fading, or is it set to skyrocket again?
The rise and rise of Cathie Wood
Since launching on 30 October 2014, New York-listed Ark Innovation ETF has been managed for over seven years by Cathie Wood. Wood invests in high-tech firms that offer ‘disruptive innovation’. These include pioneers in DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech (financial technology). Hence, her top 10 holdings include many of the US’s most exciting tech prospects, dominated by #1 holding Tesla.
In recent years, Cathie Wood has delivered enormous returns to ARKK shareholders. Since its launch, ARKK units have almost quintupled in value, rising 390%. Over five years, the ETF is also up 390%, while it has soared by 140% over the past three years. However, after an excellent start to 2021, ARKK has declined steeply over the past 10 months.
ARKK sinks
On 19 February 2020, before Covid-19 crashed global markets, ARKK’s share price hit $60.37. It then collapsed and, by 18 March 2020, stood at $34.69 — down 42.5% in a month. But then the share price went absolutely nuts, ending 2020 at $124.49. At first, this massive surge from spring 2020’s lows continued into 2021. On 16 February, ARKK’s share price hit its all-time intra-day high of $159.70. That’s 4.6 times its 2020 low, an unbelievable return of 360% in 11 months. Wow.
However, this stratospheric ETF has since come plunging back to earth. As I write, it stands at $100.93, down almost $59 from its February peak. That’s a collapse of almost two-fifths (-36.8%) in under 10 months. So, has Cathie Wood turned into Cathie Woodford, or would I back her inspiring vision today?
Why this ETF is not for me
I don’t own any ARKK units and I wouldn’t buy at current price levels. Why? Simply because the ETF doesn’t fit my risk profile as an older, income-seeking investor. This ETF is aimed at growth investors with a high tolerance for risk and volatility.
Also, although this fund has net assets of almost $21.4bn, it remains highly concentrated. Although Cathie Wood aims to have 35-55 stocks in her fund, the top 10 account for more than half (51.5%) of total assets. Furthermore, as these major holdings are almost all US tech/growth stocks, the fund has a high degree of correlation risk. In other words, its holdings often move in sync. That helps to explain why the fund is down almost a fifth (-18.8%) this calendar year. Lastly, most of AARK’s holdings are unprofitable companies promising ‘jam tomorrow’. And with interest rates poised to rise next year, that model could be a problem for ARKK investors.
Then again, I could be wrong. With such an intensive portfolio, Cathie Wood and ARKK might conceivably bounce back. For example, if euphoria were to return to markets, driving tech stocks ‘to the moon’ (via higher valuations) again. Still, whatever happens, I expect ARKK to be similarly volatile in 2022!