Over the past several years, the ARK Innovation ETF (ARKK) has been one of the most successful ETFs in the entire world. Since its inception in late 2014 through the end of 2020, ARKK returned more than 560%. It's also seen its total assets explode from $1.8 billion at the start of 2020 to around $28 billion at its peak earlier in 2021.
Some of those late entrants into ARKK, however, might be having some buyer's remorse.
Since the fund hit its all-time high in February of this year, ARKK has fallen nearly 30%.
The latest performance has resulted in ARKK shareholders beginning to head for the exits. Throughout 2020, many of the ARK ETFs rarely had a day where they didn't see new money pouring into the fund. Since its February 2021 peak, ARKK has been experiencing more net outflow days than inflow ones.
Net flows over the past 30 days have been negative for the majority of the ARK ETFs, but the selling has really accelerated over the past week.
Cathie Wood has managed to build a lot of goodwill with investors given ARK's past performance and her ETFs are still picked through daily to discover the latest trades that her group is making. But Wall Street investors tend to be a pretty fickle bunch with short-term memories. Even if past performance has been incredible, many investors still show impatience should their fund experience even a short rough patch.
Should Investors Sell ARKK?
The million dollar question on the minds of many ARK shareholders is what should they do now? Is Cathie's research model suddenly broken? I seriously doubt the answer to the latter question is yes, but what about the former?
I won't give an absolute buy/sell assessment because every individual's situation is different, but I do have a few ideas that investors should keep in mind when considering an investment in ARKK, any of the ARK ETFs or, really, any investment in general.
Understand What You're Buying
All of the ARK ETFs follow a theme of "disruptive innovation". By their very nature, these are companies that are developing very emerging technologies or products that are likely at the beginning of their life cycle. Many have little revenue and are losing money, but they're betting the farm that their next-generation innovation will blow up.
That gives these stocks very high growth potential, but also makes them very risky. When economic conditions are good, investors are willing to add risk to their portfolios and the companies that the ARK ETFs invest in are exactly the kinds of stocks investors are looking to target. If market sentiment, however, turns negative, these are also the first stocks that are likely to go.
Investors should always remember that any investment that rockets higher in a relatively short period of time has the potential to rocket back to earth just as quickly. A 30% loss over the course of about three months is no doubt painful, but it shouldn't have been unexpected. Investing in high risk stocks is never a one way street. You should be prepared to accept the good and the bad.
Reevaluate Your Risk Tolerance
Everybody is a risk seeker when times are good, but people tend to find out their true risk tolerance during the bad times. I suspect that's what many are trying to figure out right now.
If you're a short-term trader, this probably isn't the first time you've experienced some wild price swings. If you're newer to the game, this may be a new experience, but it can be a good learning one.
There's a quote I heard recently that goes "you should only invest up to your sleeping point." In other words, if watching the value of your investment drop keeps you awake at night, you probably shouldn't be in it. If you're uncomfortable with what you've seen over the past few months, perhaps a compromise would be at invest only a very small piece of your portfolio in something, such as ARKK. It's just enough to give you some skin in the game, but not so much that it significantly impacts the overall value of your portfolio.
Investing in risky assets should come with the understanding that you should also ride out the volatility. You never know where the bottom will be and the desire to sell low when things look bad almost inevitably leads to missing out on the rebound. One needs to look no further than the COVID bear market from a year ago to see what can happen. The S&P 500 dropped more than 30% in just over a month. Investors who decided to cut bait at that point missed out on the sharp recovery that saw the index back at all-time highs within just 4 months. Buy-and-hold investors experienced no net effect over that 6-month period, but the sell low group captured the losses and missed out on the gains. Granted, that won't happen every time, but it's a testament to why riding out the volatility tends to work more often than not.
Examine Your Goals
If you're young and this is your IRA money and you have 30 years to go before you'll need it, riding it out is probably your best solution. These funds are designed to be long-term investments and the potential for above average returns comes at the expense of higher short-term risks. Many people don't realize that 10% corrections happen on average about once a year. These types of pullbacks are normal and should be expected. ARKK is appropriate for long-term investing and should be considered for such when buying.
If you put your money in ARKK in anticipation of building up a down payment for a house really quickly, you're backing the wrong horse. ARK ETFs are not meant for this for just this reason. You could experience a 30% pullback very quickly and suddenly that money you had set aside for a house or a car or a vacation or whatever is now gone.
Always consider what you're going to need the money for before investing. That should guide where you should go.
ARKK is still a terrific fund. Cathie Wood is still a terrific fund manager. This is simply part of the deal when investing in a high growth vehicle.
If you are a longer-term investor, however, consider the upside. If you're a fan of ARKK when it was trading at $156, you should love it now when it's trading at $109. If you go to the store and find the outfit you want for 30% off, would you wait until it goes back to full price before deciding to buy it?
The same thing applies to your investments. Investors should at least consider the benefits of buying cheap shares here and lower the cost basis of the overall investment.
Is ARKK a buy or a sell? That's up to you to decide!