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This is my fourth take on the ARK Innovation Fund ETF [ARKK] launched by ARK Invest/Cathy Wood and her team. The purpose for this column is to bring outside view to her unique style of investing. ARKK is a unique ETF, which discloses all the trades it does daily.

How the one-year difference makes – from hero to zero – 2020 was the best year for ARKK and the year 2021 has been the worst so far. The ARKK ETF was founded in 2014. Tuttle Capital Short Innovation ETF founded the SARK on November 9th, 2021 to short ARKK – it was great timing since inception 33.95% performance (January 7th, 2022) the fund has raised over $100 million under management (broke $100 AUM December 16th, 2021).

The trading range & net assets

The ARKK closed Friday January 7th, 2022 at $84,43. 52-week trading range of ARKK is $159.70-82.65. The All Time High (ATH) was achieved February 16th, 2021 and the 52-week low January 6th, 2022.

ARKK “The Flagship Fund” had net assets of $25.5 billion June 30th, 2021. Calculating from the daily Holdings Data ARKK report dated January 7th, 2022 provided daily they have roughly $14.6 billion in assets in the fund. The ARKK September 31st, 2021 AUM was $19.4 billion. They have lost over $10 billion since June 21 or almost -43% of the assets under management.

The ETF is currently holding 44 (55 max) different stocks. I would start building a position now, but slowly with small amounts averaging monthly into the ETF. If the ETF ARKK breaks $40 level (March 22nd, 2020 Low) I would close the position. The tech sell-off is not over until the US Fed is done with rising rates. Investors can use the SARK short fund as hedge on the position, buying ARKK’s shares when and if they go lower.

ARKK’s top 10 holdings

  • Tesla (8.55%)
  • Zoom Video (6.17%)
  • ROKU (6%)
  • Teladoc Health (5.91%)
  • Coinbase Global (5.19%)
  • Spotify (4.44%)
  • Unity Software (4.33%)
  • Twilio (4.11%)
  • Exact Sciences (4.05%)
  • Block ex-Square (3.87%)

ARKK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled new product or service that potentially changes the way the world works. I, myself strongly believe that is the key to successfully stock picking. Is ARKK in the right 44 stocks? That is the question.

In 2020 the market was perfect for this idea until February 16th, 2021. Which of ARKK’s top 20 have “their max disruption potential” already priced in? I would say maybe only Tesla with its huge 1 trillion-market cap. All the other stocks are much smaller – usually less than $50 billion. Most stocks are closer to the median of $16 billion market cap.

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ARKK has a weighted average market cap at $114 billion because of the huge Tesla position. Is ARKK’s AUM 19.4 billion (9/31/21) so big that it’s forced to allocate too much to these large cap stocks, which results in dilution and reduces superior returns? The ssimple answer is no – it was “lucky” with Covid-19 and the huge bailout help from the US Fed in 2020 until late 2021. Now after the Santa Claus rally and The Fed minutes revealed last Wednesday – the market has changed dramatically – with beliefs that there might be even three or four rate increases in 2022. This is very alarming for stocks without actual earnings – with only high growth and maybe earnings in five or more years in the future.

With now 80.6% (79,61%) of the ARKK ETF’s assets in the top 20 holdings I will concentrate my analysis going forward on the moves inside the top 20. The top 20 have changed only little this time and there has been some serious selling again in Tesla – why I would ask, because ARKK can hold it with its special status at more than 10%+, it does not make any sense to sell it yet if the target price is so much higher? ARKK ETF is classified as a “non-diversified” investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), which means that it may invest a high percentage of its assets in a limited number of issuers.

One trick pony with Tesla? Which stocks are the “new Tesla” or rather “mini-Teslas”?

Tesla is still a clear #1 holding among ARKK’s assets – Wood has been a long time Tesla bull, and her conviction on the electric vehicle market hasn’t eased, even after the stock’s massive rally in 2020 and 2021. She said her base case for the stock is $3,000 in five years with the best case set around $4,000. Tesla closed Friday January 7th at $1,026.96. So Wood and the team have been selling plenty of Tesla shares again, taking the position down in the fund from 11.44%% to 8.55%. That would tell me that the fund is bleeding cash and/or she thinks Tesla is overvalued right now. Maybe both, because that is the only answer with this question. I have calculated from last Friday’s holdings that they are roughly at $14.6 billion AUM.

“I am always looking for cash, especially in the flagship fund, which is very concentrated and involves all of our technologies,” Wood has said. She was also very bullish on cryptos especially Bitcoin to rise ten fold over next five years to $500,000.

Bleeding cash on losing investments

The ARKK ETF does not hold direct crypto holdings yet, but Coinbase Global (COIN) is a large holding and ARKK has been adding to it in the last five months moving it to #5 among the top ten holdings of the ARKK ETF. The problem with the top 20 is that none of the 20 stocks have positive YTDs in 2022. So this would mean Tesla has been used as the cash asset for bleeding cash from the fund and averaging down on losing investments. In the top five #2 ZM and #3 ROKU are both at 52 week lows. These are the old Covid-19 favourites.

Exit from Zillow in 2021

Even Wood makes mistakes, buying into the drop, then something really bad was revealed by the Zillow group and Wood seriously dumped the remaining stock. Zillow is no longer in the list of the published holdings. Being a very open and public fund this was reported extensively in November – Wood was buying the dip on her favorite real estate stock, despite the revelation that Zillow Group was giving up on its AI home-flipping business.

Wood bought 288,813 shares of Zillow Group on Tuesday as the stock tanked more than 10%. The position was purchased in her flagship fund, Ark Innovation, and is worth roughly $25 million, based on Tuesday’s closing price of $87.20. Shares of Zillow continued their dismal rout Wednesday — dropping more than 17% — after the company said it was shuttering its home buying unit, called Offers. Zillow is also eliminating 25% of its workforce as it exits that business. On Thursday and Friday last week Wood almost closed down the position entirely.

The conclusion

ARKK starts to look like it was in the right place during Covid-19 in 2020, but after its February 2021 ATH of $159.70 it has lost almost half of it’s value. Investors should be aware that it might take years to reach that ATH level again. I certainly hope that ARKK recovers in future years since its approach to openly disclose all holdings and daily activities of the fund’s buy/sell are excellent for individual investors to follow.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Raine Lahtinen

Raine Lahtinen

Raine Lahtinen has spent over 25 years in wealth management and trading. His active investment days started when he attended University of Miami 1987-1991 majoring in International Finance and Marketing. He has experienced the highs and lows of the stock markets since the 1987 crash, Dot.com bubble 2001-2002, the 2008 financial crisis and the current record breaking rally.

Since 1995, Raine has been based in Brussels, Belgium in Continental Europe as an international financial advisor and director of investments in various UK IFA firms. He has written many popular columns about markets and investments during his professional life. His passion is finding undervalued listed stocks. As a Finnish native he specializes on Nordic and US stocks.

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