1 ETF to Continue to Avoid or Sell Short Until Further Notice

Cathie Wood’s actively managed ETF ARK Innovation (ARKK) has lost more than 40% over the past year, as its tech stock holdings have been hit hard amid broad market sell-offs triggered by rising interest rates and slowing economic growth. The fund is expected to continue its downtrend since the Fed will likely keep interest rates high in the near term. Hence, investors should continue to avoid ARKK. Read on…

ARK Innovation ETF (ARKK) is the flagship actively managed fund from ARK Invest, an advisory firm led by renowned investor Catherine Wood. The fund seeks to generate long-term capital appreciation by investing in companies that exhibit disruptive innovation. The businesses within the ETF cover areas such as automation, AI, robotics, and fintech innovation.

ARKK has lost 17.2% over the past six months and 42.3% over the past year to close the last trading session at $42.02. The ETF is currently trading 41.6% below its 52-week high of $72.00, which it hit on March 29, 2022.

The tech-heavy ETF remained under tremendous pressure last year due to the record-high inflation and the Fed’s aggressive interest rate hikes to fight it. A series of market sell-offs hit high-growth tech stocks vulnerable to increasing interest rates and slowing economic growth.

The central bank’s monetary tightening has managed to slow price increases in recent months. The Consumer Price Index (CPI) rose 6.4% year-over-year, slightly down from 6.5% in December. However, month-to-month inflation ticked up 0.5%, following a 0.1% increase in December. Both numbers exceeded the economists’ expectations of 6.2% and 0.4%, respectively.

The sequential rise in inflation and the stronger-than-expected jobs data in January have fueled expectations of aggressive interest rate hikes in the coming months. Most economists in a Reuters poll expect at least two more Fed rate increases and no cut by year-end. Continued rate hikes could potentially push the economy into a recession.

Since the stock market is expected to remain under pressure in the near term, investors are advised to avoid investing in businesses whose growth prospects are expected to be hurt by increasing borrowing costs.

Fund Stats

ARKK has $7.73 billion in assets under management. Over the past three months, the fund outflows came in at $619.77 million, and $145.15 million over the past six months. It has a NAV of $42.60 as of February 16, 2023, and a beta of 1.58, indicating higher volatility.

Top Holdings

The fund has a total of 36 holdings. Its principal holdings include Tesla Inc (TSLA) with a 10.44% weighting, followed by Zoom Video Communications, Inc (ZM) with an 8.24% weighting, and Roku, Inc. (ROKU) and Exact Sciences Corporation (EXAS) with 7.03% and 6.86% weightings, respectively.

Expensive Than Peers

ARKK’s expense ratio is 0.75%, significantly higher than the category average of 0.50%.

POWR Ratings Reflect Weakness

ARKK has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The ETF has a D grade for Trade, Buy & Hold, and Peer.

ARKK is ranked #86 among 118 funds in the B-rated Technology Equities ETFs group. Click here to access all POWR Ratings of ARKK.

Bottom Line

ARKK, the flagship fund of Cathie Wood’s ARK Invest, has fallen more than 40% from its 52-week peak hit on March 29, 2022. Furthermore, higher-than-expected inflation and robust jobs data could prompt the Fed to raise interest rates more than many projected, allowing the ETF to continue its downtrend since rising borrowing costs could hurt disruptive technology-oriented businesses it bets on.

Hence, we think investors should continue to avoid or sell short this ETF until further notice.

How does ARK Innovation ETF (ARKK) Stack up Against Its Peers?

ARKK has an overall POWR Rating of D, which equates to a Sell. Hence, one might consider investing in Technology Equities ETFs category peers, Vanguard Information Tech ETF (VGT), Technology Select Sector SPDR ETF (XLK), and VanEck Semiconductor ETF (SMH), with an overall A (Strong Buy) rating.

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ARKK shares were trading at $40.99 per share on Friday morning, down $1.03 (-2.45%). Year-to-date, ARKK has gained 31.21%, versus a 5.84% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.


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