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Is ARK ETFs' Stellar Journey Over?

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Ark Investment Management founder Cathie Wood has been dominating the headlines lately for seeing massive inflows into her ETF line-up. In fact, it has managed a spot among the top 10 issuers in the $5.5-trillion ETF industry, thanks to solid asset gain in 2020, per a BloombergQuint article.

In mid-January this year, the Ark Investment Management oversaw about $41.5 billion in ETF products, compared with $39.7 billion for WisdomTree, according to data compiled by Bloomberg.

Its star product Ark Innovation ETF (ARKK - Free Report) is up 156.2% in the past year and has about $27.27 billion in assets. Meanwhile, ARK Next Generation Internet ETF (ARKW - Free Report) has gained about 159.8% and has about $4.01 billion in assets. ARKK has garnered as much as $15.41 billion in assets since the start of 2020.

Is the Rally Over?

The success of ARK ETFs can partly be attributed to Tesla (TSLA - Free Report) . The stock currently has 9.13% weight in ARKK while ARKW puts 8.47% of its basket in the electric vehicle maker. Tesla’s incredible journey over the past year is not unknown to us. The stock rose 296.5% in the past year but lost 15.4% over the past month. Tesla, in fact, lost about 8.6% on Feb 22 and here’s where ARK ETFs appear to be losing ground.

Not only Tesla, Roku Inc. (ROKU) – which occupies about 6.6% of ARKK and 3.73% of ARKW – lost 6.43% on Feb 22. Another holding Teladoc Health Inc. (TDOC) – which comprises about 5.09% of ARKK and 3.97% of ARKW – lost 8.12% on Feb 22.

Baidu Inc. (BIDU), which takes about 3.59% of ARKK, was off 1.2% on Feb 22. The stock shed about 3.7% after hours. Spotify Inc. and Zillow Inc., both with weights of about 3% in ARKK, fell at least 4% each on Feb 22.  No wonder, both ARKK and ARKW were off more than 5% on Feb 22. ARKK saw its worst performance of 2021.

The reason for such broad-based underperformance lies in the jump in treasury yields. As long-term treasury yields began to spurt, the tech sector’s rich valuations got hurt. Growth stocks tend to underperform in a rising rate environment.

Vaccine distribution and a likely fat federal spending bill under the Biden administration have led to a rise in economic growth forecasts, which in tun boosted bets over rising inflation and resulted in the rise in treasury yields.

“The top holdings in ARKK are these exciting story companies, but most of the names in the ETF don’t have the established cash flow that FANG-type companies do,” said Michael Purves, founder and chief executive officer at Tallbacken. “This the most speculative part of the market, and it is showing signs of increasing vulnerability,” as quoted on Bloomberg.

Matt Maley, chief market strategist at Miller Tabak + Co, said, “a lot of the assets they own are not very liquid. Others tend to see one-way moves for period of time. Therefore, if a lot of people want to get out all at once, the situation could get uglier than normal,” as quoted on Bloomberg.

Moreover, just as the coverage for vaccine distribution is getting wider, we see more downside risks in stay-at-home stocks that ARK ETFs are currently loaded with. Meanwhile, value stocks and away-from-home stocks that underperformed in the pandemic are going to rule in the near term.

Still, the ARK funds are actively-managed. So, an efficient portfolio rebalancing may save the funds from severe losses over the medium term. 

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