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Undeterred, ARK Innovation boosts key stakes

Cathie Wood doubles down on high conviction stocks such as Tesla even as the fund falls by two-thirds.

Ark Innovation CEO Cathie Wood has faith in her disruptive technology strategy despite an 18-month sell off. Credit: Supplied photo

New technologies come with lots of excitement. The companies hold promise, but as enthusiasm ebbs and flows, share prices often move three-steps-forward and two-steps-back.

The tech selloff is testing the patience of investors who have long term faith in the theme. Year-to-date the Nasdaq Composite Index is down 34%.

The pandemic and near zero interest rates sent the fortunes of tech companies soaring. That has unraveled with rising inflation and interest rate. Until rates stop rising, there’s no relief in sight.

Here’s an update on the Canadian version of the ARK Innovation Exchange Traded Fund (ETF), the Emerge ARK Global Disruptive Innovation ETF (NE: EARK). It mirrors the much larger US fund and is hedged to the Canadian dollar.  ARK actively manages five ETFs as a sub-advisor for Emerge Canada Inc.

 Performance:  EARK has declined 62% year-to-date and 70% in the past 12 months. (The US parent ETF is down 65% year-to-date and 73% in the last 52 weeks, at the time of writing.)

Holdings: EARK has 91% of its holdings in the Americas. The top three sectors are Information technology (37%), healthcare (35%) and consumer discretionary (13%).

The top three holdings Zoom (9%), Tesla (9%) and Roku (6%) account for about a quarter of the fund. The top 10 account for about 55% of the holdings. Shopify Inc. which was a top five holding six months ago has largely dropped out of the top 10.    

The fund has a relatively high expense ratio of 0.80%.

Discussion:  The music stopped for ARK Innovation 18 months ago when the US ETF peaked at US $27.7 billion in assets. The assets have shrunk to $US 7.5 billion, a 73% decline.

Throughout, ARK CEO Cathie Wood has maintained her faith in the strategy. In a recent interview with Forbes, Ms. Wood said ARK has responded to the sell off by concentrating on its highest conviction stocks. It has reduced the number of holdings in the ETF from 57 to 34 and moved the proceeds into its favorite names. She said the fund will outperform the market once the economic pain from high inflation and the Federal Reserve’s rate increases subside.

In a webinar with investors, she reiterated that view. While US Federal Reserve is raising rates to fight inflation, she sees deflation ahead. The successive rounds of rate hikes are counter-productive and have a proporationately greater impact on tech stocks.

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The optimism is small consolation to her investors. Since most inflows occur at, or near the peak prices as investors pile in at the top, for many investors, the losses have been substantial.

Both the parent and Canadian funds will remain under pressure until interest rates peak. But although increases may be nearing an end, they aren’t likely to fall back soon

A recent CNBC Fed Survey finds that Wall Street expects the Fed to hike some more and keep them high.

So while the worst may be over, there are no optimistic tailwinds to lift ARK or EARK higher any time soon.

A version of this article appeared in the Internet Wealth Builder on Oct. 17, 2022.  For information on how to reprint it, please view this page.

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Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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