ARK’s Red-Hot ETF Fell 20% in 12 Days. The Pain for Tech Stocks Might Just Be Beginning.
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Cathie Wood, founder of ARK Investment Management
Courtesy of ARK InvestThe ARK Innovation exchange-traded fund officially entered a bear market on Wednesday. Growth investors should watch out.
The ETF (ticker: ARKK), actively managed by Cathie Wood, founder of ARK Investment Management, was one of the star performers of 2020. It gained more than 150% by riding stay-at home stars like Tesla (TSLA), Roku (ROKU), and Square (SQ) to new heights. This year started off well too, with the ETF rising 25% to $156 on Feb. 12, from $124.49 on Dec. 31.
It’s been all downhill since then. The ETF closed at $125.11 on Wednesday, down 20% in the 12 trading days since the February high. That was faster than the 13 days it took to fall more than 20% in March 2020 as pandemic fears hit stocks.
Other tech stocks are also slumping as investors move into financials, energy, and sectors they used to shy away from.
ARK investors are used to volatility and might very well be willing to hold through the pain. The problem is that ARK has experienced large inflows recently. Those new investors may be quick to exit if the fund can’t return to its winning ways.
With $23 billion, ARK Innovation is big but not massive. And it’s not the only one that owns these expensive, fast-growing stocks. In a Feb. 19 note, Goldman Sachs listed the members of its Non-Profitable Tech basket, which included Roku, Spotify (SPOT), and other names popular with hedge funds. It looks like a case where selling could beget selling.
The problem isn’t fundamental: The companies that the ARK Innovation ETF holds are still the same innovators it has held for some time. But part of the problem is that many of those companies are not working. Tesla has dropped 23% over the past month of trading, Roku has dropped 13%, and Teladoc (TDOC) has slumped 25%.
If investors continue to decide it’s time to ditch tech and buy economically sensitive stocks, the pain for growth investors might just be beginning.
Write to Ben Levisohn at ben.levisohn@barrons.com