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Should Investors Give Up On Cathie Wood's ARK Innovation ETF?

Dump ARKK or buy the dip? What should investors do regarding Cathie Wood's ETF?

Cathie Wood's ARK Innovation ETF  (ARKK) - Get ARK Innovation ETF Report has been in free fall. Wood's strategy of betting on disruptive technology worked brilliantly in 2020 and early last year.

Most of the fund's core holdings saw gains from pandemic tailwinds. Stocks like Roku  (ROKU) - Get Roku Inc. Report and Zoom  (ZM) - Get Zoom Video Communications Inc. Report benefited greatly from stay-at-home trends. However, in the post-pandemic period, both stocks, which are top holdings, have plunged more than 70% over the last 12 months. The fund itself has lost more than 65% during the same period.

In the face of all the weakness seen mostly in the high-growth and tech valuation space, should investors give up on the ARK Innovation ETF? Or is now the time to buy the dip?

Figure 1: Should Investors Give Up On Cathie Wood's ARK Innovation ETF?

Figure 1: Should Investors Give Up On Cathie Wood's ARK Innovation ETF?

(Read more from Wall Street Memes: Here's A Crucial Metric That GameStop Stock Investors Should Look At)

An Overview of ARKK's Main Holdings

Currently, ARK Innovation's main holdings consist of Zoom, weighted at nearly 11% of the fund; Tesla  (TSLA) - Get Tesla Inc. Report, at 9%; and Roku, at 8.5%. The other two companies that comprise Cathie Wood's top 5 holdings are CRISPR Therapeutics  (CRSP) - Get CRISPR Therapeutics AG Report and Uipath  (PATH) - Get UiPath Inc. Class A Report, weighted at 6% and 5%, respectively.

Figure 2: ARK Innovation's top 10 holdings.

Figure 2: ARK Innovation's top 10 holdings.

All these companies share a common philosophy. Cathie Wood looks for disruptive innovation companies with a long-term growth focus. According to ARK Invest, the fund seeks to invest in companies that offer products or services with the ability to change the world.

We're all familiar with ARKK's top three holdings: Zoom offers easy-access video communication services, Tesla makes electric vehicles, and Roku specializes in entertainment and streaming.

The other two in the top five aren't household names yet. UiPath is a global software company that makes robotic process automation software, especially for the public sector. CRISPR is developing transformative medicines for serious human genetic diseases.

High-Tech Growth Skepticism

During a bear market, the stock market plays defense. Investors tend to look for stable assets with less risk — not high-growth tech stocks with stretched valuations and little or no profitability.

As you can imagine, the latest financial results of some of ARK Invest's top holdings have not been positive.

Roku recently reported below-consensus earnings, declining user growth, and softer-than-expected guidance.

Teladoc  (TDOC) - Get Teladoc Health Inc. Report, another holding in ARK Innovation's top 10, reported a revenue miss and cut estimates for 2022. As a consequence, the stock dropped 33% post-earnings. Block  (SQ) - Get Block Inc. Class A Report plummeted after posting both EPS and revenue misses. And Coinbase  (COIN) - Get Coinbase Global Inc Report took a nosedive after reporting big misses on earnings and revenue and posting a weak outlook for the second quarter.

This indicates that, although many stocks in Cathie Wood's fund have (or used to have) high valuations, that's not exclusively the problem. The slowdown in the growth of these companies has also been a major contributing factor.

Give Up or Buy the Dip?

The ARKK investment thesis rests on one major addressable market: namely, long-term growth opportunities. Cathie Wood herself said that she has a five-year horizon.

When comparing the performances of the SPDR S&P 500 ETF Trust  (SPY) - Get SPDR S&P 500 ETF Trust Report and ARKK since 2017, the results are surprising. See below.

Figure 3: SPDR S&P 500 ETF Trust SPY and ARKK performance since 2017.

Figure 3: SPDR S&P 500 ETF Trust SPY and ARKK performance since 2017.

During its 2020 outperformance, Cathie Wood's fund inspired many investors to jump in. Now, with the S&P 500 beating ARKK for the first time in five years, investors are feeling like Wood's strategy was completely wrong.

Although both views seem to be at odds, it would not be surprising if ARKK were to beat the S&P 500 again in the next five years. Wood is still super optimistic about her strategy. She believes that the market is very close to finding the floor. She has also said that tech stocks will be the first to recover.

(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)