Cathie Wood’s Ark Innovation ETF is struggling even as the U.S. stock market has jumped this year. According to DataTrek Research, the fund is unlikely to make a bid until the Federal Reserve starts cutting interest rates.
The exchange-traded fund is “heavily weighted toward struggling disruptive tech themes that have yet to return to their winning pandemic ways, even as the S&P and Nasdaq just hit record highs,” Jessica Rabe, co-founder of DataTrek, said in a note which was sent by email on Friday.
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Shares of the Ark Innovation ETF ARKK — which is managed by Wood, the founder and CEO of investment firm Ark Invest — are down more than 13% this year, according to FactSet data at last check. By contrast, the S&P 500 SPX and the tech-heavy Nasdaq Composite COMP both posted gains of nearly 11% year-to-date after each index closed at a record peak on May 15.
The Ark Innovation ETF, which is a benchmark for speculative technology stocks in the U.S., is “extremely volatile and its one-year performance versus the S&P resembles a roller coaster back to its inception in 2014,” Rabe noted.
DataTrek highlights the ETF’s key holdings in the table below.
The ETF’s 10 largest holdings represent about 60% of its weight, with seven of the stocks down this year, according to DataTrek’s note. Three of the fund’s top 10 holdings are unprofitable – including Roku Inc. ROKU, Roblox Corp. RBLX and Crispr Therapeutics CRSP – “while the rest are trading very rich on average versus the S&P,” Rabe said.
The S&P 500 was down modestly at around 5,288 points on Friday afternoon, although at last check the widely followed index was still on track for a fourth straight week of gains, FactSet data showed. The Ark Innovation ETF rose 0.8% on Friday afternoon, for a monthly gain of about 4.3%.
One thing the Ark Innovation ETF’s top 10 holdings have in common is that they all peaked during the COVID-19 pandemic, Rabe found.
“We don’t see ARKK names getting a bid until the Fed starts cutting rates and yields move down sustainably to support their high valuations,” she wrote, citing the ticker for the ETF.
“As we have said many times in recent years, we prefer the Nasdaq Composite” or Nasdaq-100 index NDX, followed by the Invesco QQQ Trust Series I QQQ “as better ways to play the theme of disruptive innovation,” added Rabe to it.
A spokesperson for Wood and her firm did not immediately comment on the Ark Innovation ETF’s performance.
Many investors expect the Fed to start cutting rates later this year, with federal funds futures pointing to a possible first cut in September, the CME FedWatch Tool shows.
Meanwhile, U.S. stocks have risen this month amid a decline in Treasury yields. The S&P 500 is up 5.1% so far in May, while the Nasdaq is up 6.3% and the Dow Jones Industrial Average DJIA is up 5.6% at last check, according to FactSet data.
In the bond market, the yield on the 10-year Treasury bond BX:TMUBMUSD10Y was trading around 4.42% Friday afternoon.
