The ARK ETFs Loaded Up On Robinhood; That's A Mistake

Cathie Wood added Robinhood shares to three of the ARK ETFs shortly after their public debut.
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Robinhood (HOOD) seems like a natural fit for Cathie Wood and her ARK family of ETFs. It's a disruptive tech platform that has become the trading tool of choice for many younger risk-seeking investors. Up until it went offline last year, RobinTrack.net was on the radar of just about every market watcher looking to gauge the latest sentiment of retail investors.

It's not surprising then to see that ARK added Robinhood shares to three of its ETFs following yesterday's IPO debut.

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Earlier this week, I wrote about three ETFs that Robinhood shares could quickly show up in. The ARK Fintech Innovation ETF (ARKF) was on that list and it did indeed make an early investment. The ARK Innovation ETF (ARKK) gathers all of ARK's best ideas, so it's no surprise to see HOOD shares showing up there either. Similarly, the ARK Next Generation Internet ETF (ARKW) makes a lot of sense to hold HOOD.

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As of last night, Robinhood was one of the smallest holdings in each of the three ETFs, accounting for somewhere between 0.3% and 0.5%, so we're not talking about Cathie Wood taking major positions here. It may get to that point eventually, but these are just starter allocations for now.

Now, for the question of whether or not this was a good idea.

There were warning signs ahead of time that this wouldn't be your typical IPO. Outside of the fury the company caused with the Reddit crowd by limiting trading activity on meme stocks, such as GameStop (GME) and AMC (AMC), there's the issue of how the company makes its money. It turns out that more than 80% of revenue is generated from payment for order flow, the somewhat controversial practice of directing trades to specific brokers based on what kind of cut Robinhood might get in return. There are significant questions of how ethical the practice is and how it might disadvantage retail traders. There have even been calls to ban the practice altogether.

Then there is the fact that FINRA will investigate Robinhood for potential insider trading. I doubt this one results in any serious consequences outside of a fine, but it's not a good look for any company, let alone one that's about to go public.

Investors may have sensed it as well.

Robinhood was looking to price its shares in the $38-42 range. It ultimately decided to go public at $38, the bottom end of its range. Going public at the bottom end of the price range is usually an indicator of soft demand. Most companies want to benefit from the optics of seeing the stock price pop on the first day, but there's also the issue of trying to raise as much money as possible. Going public at $38 was a warning sign.

Turns out that warning sign should have been heeded.

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The stock opened right around its IPO price, but dove almost immediately. As of early Friday morning, HOOD was trading down 10% from its IPO price. What should have been a victorious moment for the company went completely south in a matter of days.

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Robinhood's IPO turned out to be a dud. Actually, it turned out to be a historic dud. Given the questions and potential problems surrounding its business model, legal issues and lack of investor demand, it's tough to get too optimistic about where the stock heads from here.

Which brings me back to the question of whether ARK's investment in HOOD was a good idea. The company has taken very minor stakes in Robinhood stock, so it's not like the share prices of ARKK, ARKW and ARKF are going to be materially affected even if the stock goes completely bust.

Robinhood certainly fits the ARK model of "disruptive innovation" and it makes sense that the company would take a position. It doesn't seem like it's an investment that's going to pay off in the short-term.

ARKK, ARKW and ARKF are little changed on the year so far.

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