ARKK: ARK Invest And The Growth Crush (NYSEARCA:ARKK) (2024)

The Market Carnage Has Continued

The ARK Innovation Fund (NYSEARCA:ARKK) is one of the leading growth funds. It has been one of the hardest-hit ETFs by the consistent sell-off of growth stocks over the past month has jolted investors. This sell-off is driven by a flurry of reasons: the Federal Reserve tightening its balance sheet, a continuous flow out of equities, and rising interest rates. Sectors such as electric vehicles, telehealth, and others have been hit especially hard. Many companies in these industries are not producing viable cash flows. There is no room for growth names in an environment where energy and industrials have been the staples. Many fund managers have trimmed their positions in these former high flyers. One of the most high-profile examples is Bill Ackman of Pershing Square Capital, which sold all of its Netflix (NFLX) shares in the face of a disastrous Q1 that saw Netflix lose 200,000 subscribers while analysts were expecting a gain. This is only the beginning of many growth names seeing extremely weak earnings runs. A more recent example is the Snowflake (SNOW) earnings on May 25th. The stock beat top and bottom expectations but still fell after-hours. The stock has now eclipsed its IPO price.

Cut-in-half once and cut-in-half again

Both of the tickers mentioned above have been cut in half and then cut in half again. Some would say we are in an inverse growth bubble. This may be true given the bearish market sentiment that would negatively impact these names. In this market, there is little room to run. That's why many investors have left the stocks for defensive dividend-paying options.

The SPY (SPY) market bellwether is the best way to track how well a single stock has performed against the market. I used Upstart (UPST), Snapchat (SNAP), Coinbase (COIN), and Roku (ROKU) as comparisons. These were the former Street darlings as they saw massive price appreciation in 2021. This was especially true for Upstart as fintech and BNPL was a big theme in 2021. Even with positive earnings and excellent (50%) growth rates, the stock is still down more than 80% off its highs. This doesn't bode well for many of the funds holding Upstart, as many growth funds have seen incredible downtrends.

ARK Invest Goals

Currently, ARK heads up five active ETFs and three index ETFs. ARK Genomic Revolution (ARKG), ARK Autonomous Technology & Robotics ETF (ARKQ), ARK Innovation ETF (ARKK), ARK Space Exploration & Innovation ETF (ARKX), and ARK Fintech Innovation ETF (ARKF) make up the five active ETFs. All of these ETFs have a singular goal of innovation in mind; however, with the recent sell-off, the former bellwethers have been thrashed along with other growth stocks. Many have speculated that ARK Invest has had positive fund flows even through the turbulence. However, when evaluating the funds' AUM, that is not the case.

ARKK Goals

The flagship ARKK fund is the one that gets the most investor scrutiny and is the biggest by AUM compared to the other ETFs. Innovation is at the heart of ARK Invest and investors need to look no further than ARKK. The fund takes up between 35 and 45 positions all characterized by innovation. Historically picks such as Tesla (TSLA) and Teladoc (TDOC) have been stalwarts in the portfolio. These have seen massive declines and investors should take note of these stocks taking up almost 20% of ARKK. ARK Invest currently looks to these stocks as the future of the world as we know it. ARK itself states that it believes in these new products and services.

ARK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled product or service that potentially changes the way the world works. Companies in ARK’s cornerstone strategy aim to capture the substantial benefits of new products or services associated with scientific research in DNA technologies, energy storage, the increased use of autonomous technology, next generation internet services, and technologies that make financial services more efficient.

Source: (ARK Invest ARKK Info)

The Myth of Fund Flows into ARK Invest and ARKK

Cathie Wood's ARK Invest is the parent company of various ETFs. Each ETF focuses on a specific sector of innovation in the market. While 2021 was a great year, the fund was adversely affected by the cutting of growth. Currently, the market is only rewarding the bellwethers. Any non-dividend-paying stocks will be outpaced by inflation.

The weakness in ARK is not insulated; the market gives consequences for getting out of line. Many of my recommendations have seen significant downtrends. Charlie Munger is one of the most outspoken critics of these 'innovation assets'. He famously said that Bitcoin (BTC-USD) was 'Rat poisoned squared' when bitcoin was at roughly 30,000 a coin. While many criticized Charlie, his comments have held up. Bitcoin is back around the price when he made those comments. Charlie, of course, serves as No. 2 at Berkshire Hathaway (BRK.A) (BRK.B) and is one of the greatest investors of all time. Berkshire Hathaway is a far call from ARK Invest. This is not inherently a bad thing though. The market has given many investors a gift by letting them understand the inherent risks associated with these names. This is the culmination of the advice many major investors gave smaller investors back in 2021.

The weakness in Ark's flagship ETF puts its assets under management well below its record of $28 billion reached in 2021. The ETF currently has $8.8 billion in assets under management

Source: (Ark Invest's 75% decline in its flagship ETF hasn't stopped investors from pouring $1.3 billion into the fund in 2022)

These significant declines have not stopped retail investors. Even though ARK Invest's total AUM has fallen from $23 billion last quarter to $8 billion this quarter, there are still willing buyers. Many people still believe in innovation, and the recent dip is just the cost of investing in these names. I tend to agree as volatility is the nature of stocks. The market is a tricky beast and doles out pain where it belongs. In the current environment, stocks, in general, may not fare well, even the value names.

Federal Reserve and the Pulling Back of Accommodations

The fight against inflation will get more challenging as time goes on. With the CPI index rising 8.3% over the past 12 months, the basis rate hikes by the Fed haven't seemed to make a dent. Arguably the economy has been held up by the role of the consumer. Many expected the consumer appetite to decrease with rising inflation, but consumption has remained strong. The fed is acutely aware of this, which is potentially why they waited so long to act.

The Federal Reserve announced that it’s raising interest rates 0.50 percent, following its May 3-4 meeting, bumping the federal funds rate to a target range of 0.75 to 1.00 percent. The move follows an increase of 0.25 percent in March, as the Fed continues reducing liquidity to the financial markets to help tamp down soaring inflation.

Source: (Bankrate: Biggest winners and losers from the Fed’s interest rate hike)

The Federal Reserve will do as they see fit with the economy. The bottom line is that inflation is running rampant; there has been a continued hawkish stance by the Fed. This is due to their previous dovish stance of keeping rates down. QE has not worked; Jerome Powell and company have made decisions that have crushed the market due to rapid changes ranging from easy-money monetary policy to hawkish rate rises.

Conclusion and Market outlook

Markets are funky in times of turmoil. Everything seems to be falling but not in the long-term perspective. Even the drop in growth stocks will end. Investments go up and down, and there is little individuals can do. Many stocks can't keep up with ETFs and high-yielding dividend stocks in markets like these. Overall, the continued bearish sentiment will pass, and markets will continue to live another day. Investors need to closely scrutinize these stocks and come away with a couple of key takeaways. Firstly, volatility is the nature of stocks, and investors should be able to take these swings if they want to be in these names. Secondly, ARK Invest is just one of a number of growth ETFs and investors should be wary of portfolio managers selling them a box of goods. I believe that once investors understand these risks, they can actively make an educated decision to invest in ARKK and its sister funds. I rate ARKK a hold based upon macro risks and the dark path growth stocks have continued to go down.

I made this page because I enjoy learning about publicly listed companies and publishing my opinion. I sincerely hope you’re able to find useful information to meet your investing goals.