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ARKK In An Unusual Spot... Down 10% And Losing Money

The current correction is unusual by ARK standards, but these types of swings are normal and should be expected.

With all the attention that's been given to the ARK ETF success story of the past few years, its huge returns and massive inflows, it's important to remember that these are risky funds prone to corrections just like any other product.

Investors are getting a taste of that over the past week and it looks like they're not liking what they see.

Over the past two trading days (Monday & Tuesday), the biggest ARK fund, the ARK Innovation ETF (ARKK) is down nearly 9%. From its peak earlier in 2021, ARKK is around 12% off its all-time high.

ARKK ETF in correction territory

ARKK ETF in correction territory

The two most recent periods where ARKK fell 10% off its high were September 2020 and October 2020. Both instances were marked by S&P 500 losses of between 8-10%, so the current market where the index is still less than 2% off of its high is a bit unusual.

Part of that, of course, is that tech is leading on the way down here. A bigger factor is that Tesla (TSLA), ARKK's top holding at around 10% of assets, is down more than 20% from its 2021 peak.

Looking at weekly returns for ARKK over the past five quarters (or week-to-date in the case of right now), this week's 9% isn't terribly unusual by historical standards, although it is the steepest loss since the heyday of the COVID pandemic.

ARKK ETF Weekly Returns source: ETF Action

ARKK ETF Weekly Returns source: ETF Action

If it holds, this would be the 8th week since the beginning of 2020 where ARKK lost more than 5%. ARKK is about 50-60% more volatile than the S&P 500 depending upon which metric you use, so these types of returns are relatively normal for this level of risk and should be expected over time.

One interesting development here is that ARKK experienced an outflow of nearly half a billion dollars on Monday, easily its biggest withdrawal for the fund's lifetime.

ARKK ETF Daily Flows

ARKK ETF Daily Flows

This pretty clearly looks like an unwinding of the short-term FOMO trade. I'd guess that much of this outflow is coming from performance chasers who bought near the top and are cutting bait at the first sign of trouble. Granted, a lot of the flows lately are likely from performance chasers, but this doesn't feel like long-term money that's moving out here.

Overall, I think Cathie Wood and team have earned the benefit of the doubt at this point. It's important to point out that all of this is the result of just two trading days of action. Short-term periods like this are normal and will certainly come when investing in high tech, disruptive innovation companies.

Longer-term investors should probably keep hanging on here and the ride the volatility. As we've seen multiple times over the past year, periods of sharp declines have been followed by periods of sharp rebound. With Jerome Powell coming to the market's rescue last week with his commentary on Capitol Hill, we could be setting up for another of those rebounds.

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