Skip to main content

ARK Innovation: Cathie Wood’s ETF Could Rip Higher

The ARK Innovation ETF keeps sinking. But if the tech bubble of the early 2000s can serve as a parallel, ARKK investors may be positioned for sizable gains ahead.

Few would disagree that the tech-rich ARK Innovation ETF  (ARKK) - Get ARK Innovation ETF Report is staring straight into a perfect storm of bearishness. This is about the worst macroeconomic scenario to hold high-growth, rich-valuation stocks.

Yet, I see a chance that Cathie Wood’s flagship fund could eventually roar back to life in a vicious meltup. Below, I talk about how the stocks of early-stage tech companies produced lavish returns following the bursting of the dot-com bubble, in the early 2000s.

Could something similar happen to ARKK this time?

Figure 1: ARK Innovation: Cathie Wood’s ETF Could Rip Higher

Figure 1: ARK Innovation: Cathie Wood’s ETF Could Rip Higher

(Read more from Wall Street Memes: AMC Stock: The Golden Ticket For Shareholder Value)

ARKK faces challenges

Is ARKK overdue for a rebound? I would argue that it isn’t yet, since the portfolio is facing headwinds that feel as strong as ever.

For starters, inflation picked up the pace in the second half of 2021, prompting central banks to start planning for tighter monetary policy. An increase in interest rates bodes ill for the value of growth stocks that carry rich valuations — i.e. ARKK’s entire portfolio, basically.

Then, few anticipated the full-blown conflict in Eastern Europe. Because of it, commodity prices spiked, producing even more inflationary pressures. Also, de-globalization (even if temporary) has started to raise questions about the strength of the post-pandemic recovery.

Lastly, ARKK’s investments are concentrated in stocks that performed very well during the COVID-19 lockdowns. Think of Zoom  (ZM) - Get Zoom Video Communications Inc. Report and Teladoc  (TDOC) - Get Teladoc Health Inc. Report as classic examples. In the “return to normal” economy, investing in these companies has been less compelling.

The glass-half-full view

Having said the above, ARK Innovation has undergone a mind-boggling 65% decline from the peak reached in early 2021, after the ETF climbed a stunning 315% from the bottom of the COVID-19 bear through February of last year. This is typical bubble behavior.

ARKK’s full ballooning-to-popping cycle was atypically short: roughly two years so far. I cannot think of such erratic price behavior in the past many years or even decades.

Still, the tech-rich Nasdaq is a case study that could foretell what happens next to the ARK Innovation ETF. If so, ARKK investors could be in for a nice surprise ahead.

Tech stocks zipped higher in the late 1990s to reach a peak in March 2000, in a clear sign of market exuberance (maybe clearer now, with the benefit of hindsight). From there, the Nasdaq 100 tumbled an impressive 70%-plus and bottomed in September 2002.

Over the following five years, tech stocks recovered strongly: cumulative gains of 160%, or about 21% annualized. This is roughly twice as high a return as the broad stock market’s throughout history.

The 2008 recession paused and then unwound some of the tech recovery. Without it, maybe the Nasdaq would have made all-time highs sooner than 2016. In any case: from the 2002 bottom to the late 2021 peak, tech stocks returned an impressive 17% per year over two decades.

Of course, such gains would have only been possible if an investor had jumped in precisely at the September 2002 bottom. But even without perfect timing, a buy-the-dip play could have been highly successful.

Suppose an investor waited for the Nasdaq to correct as much ARKK has so far in 2021 and 2022: exactly 65%. From that point, the trade would have still produced annualized gains of well over 10% over the following 20 years.

Will dip-buyers be rewarded?

In the short term, it is hard to be very optimistic about ARKK. The ETF has been discounted plenty in the past many months, but the fund is still struggling to find a bottom.

Then, there is always the risk that stocks like Roku  (ROKU) - Get Roku Inc. Report and Block  (SQ) - Get Block Inc. Class A Report may not revisit their glory days in the coming several years, if ever.

But if ARKK’s story ends up resembling the tech bubble of the early 2000s, investors that buy shares around now could earn sizable returns — even if the recovery plays out over a long period and tests the patience of bargain hunters.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)