On 22 November 2021, the tech-heavy Nasdaq Composite index hit its all-time high of 16,212.23 points. Four months later, it stands at 14,046.49, down 2,165.74 points (-13.4%) from its peak. Thus, US tech stocks have had a hard time lately. However, the Nasdaq has gained 11.5% since closing at 12,581.22 on 14 March. But far worse has been the performance of the highly popular ARK Innovation ETF (NYSEMKT: ARKK) managed by Cathie Wood.
The ARK Innovation ETF’s rise and fall
On 30 October 2014, Cathie Wood, an evangelical Christian from Los Angeles, launched her flagship exchange-traded fund: the ARK Innovation ETF. This New York-listed fund invests in fields including DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech (financial technology). Wood named her investment group Ark Invest after the Biblical Ark of the Covenant. And from 2019 to early 2021, the returns from ARKK were positively heavenly.
From launch to peaking in February 2021, ARKK delivered a market-busting return of 683.6%. Hence, $1,000 invested in the ARK Innovation ETF on day one would have surged to $7,836 when the share price peaked at $159.70 on 16 February 2021. Sadly, after this meteoric rise, ARKK’s performance came crashing back down to earth. On 10 May 2021, I warned that although the ARKK share price was down 30%, I would not be investing in this ETF. As I write, the share price stands at $66.09 — down a whopping 58.6% from its record high. Here’s how the ARK Innovation ETF’s share price has performed since inception:
| Year | Closing price | Yearly change |
| 2014 | $20.16 | – |
| 2015 | $20.46 | 1.5% |
| 2016 | $20.05 | -2.0% |
| 2017 | $37.08 | 84.9% |
| 2018 | $37.19 | 0.3% |
| 2019 | $50.05 | 34.6% |
| 2020 | $124.69 | 149.1% |
| 2021 | $94.59 | -24.1% |
| 2022* | $66.09 | -30.1% |
As you can see, Cathie Wood’s reputation was made in three outstanding years: 2017, 2019, and 2020. But this exceptional investment performance mostly occurred during the Covid-19 crisis. During 2020-21, as US tech stocks soared to record heights, conventional investment wisdom (based on fundamentals) went out of the window. And as the ‘pandemic panic’ receded, sanity was eventually restored. This led to many highly valued stocks — and the ARK Innovation ETF — slumping dramatically over the past 12 months.
What next for ARKK?
For now, the worst may be over for owners of ARK Innovation ETF shares. At their 2022 low, they slumped to just $51.85 on 14 March. Nine days later, they have leapt by more than a quarter (+27.5%). That’s a big jump in a short time, but is it sustainable in the long run? I’m far from convinced.
As an old-school value investor, I prefer to buy shares trading on low earnings multiples, high earnings yields, and generous dividend yields. In contrast, Cathie Wood has packed her ARK Innovation ETF with high-growth, high-valuation US stocks including Tesla, Teladoc Health, and Roku. With 33 to 55 stocks in her portfolio, Cathie is bound to hit the jackpot with a few of her investments in ‘disruptive innovation’. Then again, on 1 May 2021, mega-billionaire investment legend Warren Buffett offered some wise words about buying go-go growth stocks. The Oracle of Omaha remarked, “There’s a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future”.
As for me, looking at Cathie Wood’s stock picks in the ARK Innovation ETF, I can’t find a single share that I’d like to buy today. Therefore, I still won’t be buying into this former high-flier. To be honest, ARKK is far too rich for my blood. But younger, less risk-averse investors could take the opposing view — and might be proved right over time!
