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Cathie Wood’s ARKK ETF: This Could Help To Lift Shares

Cathie Wood’s ARK Innovation ETF, a loser so far in 2022, could benefit from the current geopolitical crisis. Here’s how.

On the same day that the US announced a ban on Russian oil, Cathie Wood’s ARK Innovation ETF  (ARKK) - Get ARK Innovation ETF Report outperformed the S&P 500 by quite a bit.

Despite broad market softness, the recent developments in Eastern Europe could help to support ARKK, which remains in a deep drawdown of 62% from the peak.

Today, Wall Street Memes explains why ARK Innovation could find some breathing room amid a generally bearish stock market.

Figure 1: Cathie Wood’s ARKK ETF: This Could Help To Lift Shares.

Figure 1: Cathie Wood’s ARKK ETF: This Could Help To Lift Shares.

(Read more from Wall Street Memes: Should You Buy Rivian Stock Ahead of Earnings?)

ARKK could benefit from clean energy push

ARK Innovation is known for investing heavily in disruptive technology companies, whose stocks tend to trade at high valuations. The main appeal of these investments is the aggressive long-term growth prospects.

But these have been terrible bets in 2022 and most of last year. With interest rates set to rise and the geopolitical jitters favoring commodity and value plays, Cathie Wood has struggled to impress investors as she used to.

However, the current crisis has been unique in one way: it has restricted the supply of crude oil around the globe, sending energy prices higher and causing tension among nations to rise.

This is why, for example, airline stocks have fallen off a cliff in the past few days. The airline ETF  (JETS) - Get US Global Jets ETF Report sank 28% in only about three weeks between mid-February and March 7. As a reminder, the top expense category for airlines is jet fuel.

Market distress could be another headwind for ARKK to face. However, the ETF may also benefit from renewed bullishness towards the clean energy space.

Alternative energy is a potential longer-term solution for oil dependence. Faced with the Russia-Ukraine crisis, governments could make a stronger push to develop clean energy infrastructure more quickly going forward.

(Read more from Wall Street Memes: Tesla: How Elon Musk Sees The Oil Crisis)

Does ARKK invest in clean energy?

Having said the above, ARKK is not one of the top investors in clean energy stocks. I would argue that only its Tesla stock  (TSLA) - Get Tesla Inc. Report holding is indirectly involved in the energy revolution.

So, why should clean energy help to support ARKK share price? First, because Tesla is its largest holding at nearly 10% allocation. As gas prices increase, so does the appeal of electric vehicles. For every 1% change in TSLA stock, ARKK should move by roughly 0.1%.

The second reason is that the performance of clean energy and other growth stocks tend to correlate tightly. Visually, the graph below helps to support the idea.

Figure 2: The performance of clean energy and other growth stocks tend to correlate tightly.

Figure 2: The performance of clean energy and other growth stocks tend to correlate tightly.

Even though ARKK and the iShare Global Clean energy ETF  (ICLN) - Get iShares S&P Global Clean Energy Index Fund Report do not share a single holding in common, they have moved almost in lockstep. Over the past five years, the correlation coefficient between the two ETFs has been 0.7 out of a maximum of 1.0.

So, buy ARKK now?

To be clear, I am not necessarily making a bullish case in favor of Cathie Wood’s ARK Innovation. Instead, I am trying to establish a potentially bullish connection between the current energy crisis and the future performance of the fund.

Regarding investment strategy, I continue to think that investors should wait for momentum to decisively shift in favor of ARKK before committing money to it.

I talked about my favorite approach in this case: to use moving averages to find an entry point. Following this strategy, I would not yet consider owning ARKK at this moment.

(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)