The UK version of ARK

There is a version of this ETF that’s available to UK investors today. Launched on the London Stock Exchange (LSE) in April last year, it’s called the ARK Innovation UCITS ETF (LSE: ARCK) and it’s available on my investment platform, Hargreaves Lansdown, and a few other platforms.

Like the original US-listed product, the ETF seeks to invest in companies involved in ‘disruptive innovation’ (defined as companies introducing technologically-enabled new products or services that potentially change the way the world works). Areas of focus include artificial intelligence (AI), robotics, energy storage, multiomic sequencing, and public blockchains.

For the UK-listed ETF, expenses are 0.75% a year (relatively high for an ETF). Investors may also need to pay trading fees and platform charges.

In terms of performance, it has been strong since launch. In the 14 months or so that the ETF has been listed on the LSE, its value has increased about 30%.

Should I invest?

So, the ETF is available to UK investors like myself. The question is – should I invest?

I do like the concept of an innovation ETF. Today, the world is experiencing an incredible technology revolution and I want to be capitalising on it.

With this ETF, I potentially can. I like the fact that it provides exposure to themes such as AI, robotics, and fintech – these are all industries with huge growth potential.

Looking at the holdings, however, the ETF looks quite risky to me. Currently, Tesla is about 9% of the portfolio. I’m not so keen on that stock (I think it’s way overvalued at current prices). Other top holdings include Roblox, Roku, and Palantir – three stocks I see as high risk and quite speculative.

One other thing that concerns me a little is long-term performance. Over the last five years, the US-listed version of the ARK Innovation ETF has fallen about 9%. That compares to a gain of over 20% for the UK-listed Scottish Mortgage Investment Trust, which has a similar focus (and a lower ongoing fee).

I’ll point out that I already have a decent-sized position in Scottish Mortgage in my portfolio. So, buying the ARK Innovation ETF as well would mean doubling up on my exposure to higher-risk disruptive growth stocks.

My thoughts on ARK

Given the current holdings and underwhelming five-year performance, I’m going to keep the ARK Innovation ETF on my watchlist for now. I may add it to my portfolio at some stage in the future but in the near term, I’m going to stick with Scottish Mortgage as my play on disruptive growth stocks.

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ARK Innovation ETF: superstar fund

Cathie Wood launched the ARK Innovation ETF — her flagship exchange-traded fund — on 30 October 2014. This New York-listed fund invests in what Wood calls “disruptive innovation“. These high-tech fields include DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech.

From its launch until 2016, returns were fairly pedestrian. But then the shares skyrocketed by 84.9% in 2017 and leapt 34.6% in 2019. But the best was yet to come. During Covid-stricken 2020, the shares soared by an astonishing 149.1%. This earned Cathie Wood the nickname of ‘The Queen of the Bull Market’. But shares in her super-fund were peaking and set to sink.

ARK sinks

At its all-time high, the ARK Innovation ETF’s share price peaked at $159.70 in February 2021. But then the stock came crashing back to earth. On Thursday, it closed at $47.75, down $4.68 (-8.9%) in a single day. This leaves this one-time wonder-stock down 70.1% from its record high. I feel it also leaves Cathie Wood’s reputation weakened (for now).

Furthermore, here’s how the ARK Innovation ETF’s share price has performed over six other timescales.

As you can see, owning the stock has been a disaster over periods ranging from one month to one year. However, over five years, shares in the ARK Innovation ETF have risen by nearly 79%. This means Cathie Wood’s fund has narrowly outperformed the S&P 500 index, which gained 73.4% over the same period, all excluding dividends.

From star to dog

Summing up, Cathie Wood made her name by thrashing the wider market in three key years: 2017, 2019, and 2020. But she has since fallen foul of what I call ‘Sirius syndrome’ (Sirius is also known as the Dog Star). Many star funds — and fund managers — eventually go on to become dogs. Likewise, some dog funds (and their managers) go on to become stars.

This is an almost inevitable outcome, thanks to two powerful factors: the first is reversion to the mean, and the second is style rotation (often between growth and value stocks). During the pandemic panic, Cathie Wood’s high-risk, high-return strategy worked a treat. But in this new era of red-hot inflation and rising interest rates, investors are flocking to the safety of low-priced value shares.

Would I buy ARK Innovation today?

At its 2022 low, the ARKK share price hit $45.89. It’s currently 4.1% above this. But this stock is hugely volatile, spiking up/down 10% in 24 hours during 4-5 May. As a veteran value investor, this kind of stock (high risk, high valuation and high volatility) is the exact opposite of what I want to own. Hence, I won’t buy ARKK right now. However, if or when US tech stocks stage another recovery, then the shares could soar skywards once again!

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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:

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!

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Ark Innovation ETF skyrockets

From 2019 to early 2021, returns from the Ark Innovation ETF were astonishing. They were outstanding because it invested in what Cathie Wood calls “disruptive innovation“. This includes fields such as DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech (financial technology). Many of ARKK’s highly speculative stocks soared during the Covid-19 pandemic as investor expectations went sky-high.

In 2019, ARKK gained 34.6%, before skyrocketing by 149.1% in Covid-hit 2020. The stock kept rising, hitting an all-time high of $159.70 on 16 February 2021. From launch on 30 October 2014 to last February’s high, this New York-listed ETF returned an incredible 683.6% (excluding dividends). This would have grown $1,000 into over $7,836 in under six-and-a-half years. This earned Cathie Wood the nickname of ‘The Queen of the Bull Market’. Investors also likened her to legendary mega-billionaire investor Warren Buffett.

ARKK crashes back to earth

Alas, it’s been all downhill for ARKK since February 2021, as the ETF crashed spectacularly over the past year. It ended 2021 at $94.59. But 2022 has been brutal for Cathie Wood, as her prized ETF’s stock kept plunging. At one point on Friday, it hit a 2021-22 low of $63.99. So far, the stock has crashed by almost 60% from its record high. This means it’s back to where it stood in early June 2020, wiping out roughly 20 months of gains.

Would I buy this ‘spec tech’ stock today?

After collapsing by 31.5% in 2022, is ARKK now in Mr Market’s bargain bin? One positive note is that the stock is down a mere 2.3% since 27 January. This was the day Cathie Wood predicted would mark the bottom of 2021-22’s tech crash. However, I saw something eerie and worrying last week. It was a chart that overlaid the Nasdaq’s path from 1996 to 2001 with ARKK’s performance from 2017 to 2022. The correlation was striking. Both lines surged in sync, before plunging together. When market bubbles finally burst, they sometimes deflate in similar fashion — in my experience.

I don’t own ARKK at present, but would I buy this stock after its precipitous decline? As a veteran value investor, I usually steer well clear of speculative tech stocks. Also, as Warren Buffett said on 1 May 2021: “There’s a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.” Right now, I’m seriously unconvinced that Cathie Wood can repeat her market-beating performance of 2019-21.

In addition, the US faces strong economic headwinds. These include red-hot inflation, interest-rate rises and higher bond yields in 2022-23. These conditions are hardly conducive to an upward re-rating of ‘spec tech’ stocks. I didn’t buy ARKK before and have yet to change my mind. But, of course, its investments could still pay off and I could be wrong about it — as I was in 2019-20!

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However, in recent years, doubters have started taking pot-shots at the 91-year-old guru. The stellar performance of Berkshire Hathaway (NYSE: BRK.A), his conglomerate, has eased off over the past decade. In the last five years, Berkshire stock has gained 91.3%, versus 92.9% for the S&P 500 index (all returns in this article exclude dividends). But over the past 12 months, Berkshire stock has leapt 35.7% — more than double the S&P 500’s 17.4% gain. So, for the past year at least, backing Warren Buffett was once again a wise move.

‘The Queen of the bull market’

Since 2019, one major contender has stepped up — a challenger to seize the throne and take the crown from the world’s greatest investor. She’s Cathie Wood, manager of the wildly popular ARK Innovation ETF (NYSEMKT: ARKK). Wood, a 66-year-old devout Christian from Los Angeles, named her fund group Ark Invest after the Biblical Ark of the Covenant. And in 2020, her ARKK exchange-traded fund’s performance was nothing short of heavenly, easily thrashing Warren Buffett’s returns.

Cathie Wood has managed the ARKK ETF since it was launched on 30 October 2014. This New York-listed ETF invests in ‘disruptive innovation’ in fields such as DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech (financial technology). Thus, Wood’s fund is heavily weighted towards highly rated tech stocks — with the largest holding being electric carmaker Tesla.

From its launch in late 2014 to peaking in February 2021, ARKK delivered a colossal return of 683.6%. In other words, $1,000 invested in this ETF at launch would have been worth over $7,836 at the peak price of $159.70 on 16 February 2021. But such market-thrashing returns rarely persist and quite often become a flash in the pan. On Friday, ARKK closed at $68.91, having collapsed by more than half (-56.9%) from its all-time high. So far in 2022 — just a month into the year — ARKK has crashed by more than a quarter (-27.2%). And over 12 months, the stock has collapsed by 51.7%, making it one of the worst-performing US ETFs over one year. So much for Cathie Wood stealing Warren Buffett’s crown.

Warren Buffett trounces Cathie Wood over one year

Though I admire and respect Cathie Wood, her reputation relies on just three outstanding years: 2017, 2019 and 2020. Here’s how ARKK has performed since end-2014.

As shown, ARRK had three dull years, three exceptional years, and an awful 2021. Thus, its five-year gain has declined to 207.9% — still an excellent return. However, with the stock now deep into bear territory, anyone backing Cathie Wood since late June 2020 will have lost money (on paper or in reality). Meanwhile, investors backing Warren Buffett have been handsomely rewarded. Over one year, $1,000 invested in Berkshire stock would be worth more than $1,357 today, versus $483 in ARKK.

In short, ARKK’s collapsing stock over the past year has cost Cathie Wood’s fans billions of dollars. Meanwhile, Berkshire Hathaway’s market value has soared to nearly $700bn. This has added almost $30bn to Warren Buffett’s personal wealth. That’s why he’s still my hero!

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The rise and rise of Cathie Wood

Since launching on 30 October 2014, New York-listed Ark Innovation ETF has been managed for over seven years by Cathie Wood. Wood invests in high-tech firms that offer ‘disruptive innovation’. These include pioneers in DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech (financial technology). Hence, her top 10 holdings include many of the US’s most exciting tech prospects, dominated by #1 holding Tesla.

In recent years, Cathie Wood has delivered enormous returns to ARKK shareholders. Since its launch, ARKK units have almost quintupled in value, rising 390%. Over five years, the ETF is also up 390%, while it has soared by 140% over the past three years. However, after an excellent start to 2021, ARKK has declined steeply over the past 10 months.

ARKK sinks

On 19 February 2020, before Covid-19 crashed global markets, ARKK’s share price hit $60.37. It then collapsed and, by 18 March 2020, stood at $34.69 — down 42.5% in a month. But then the share price went absolutely nuts, ending 2020 at $124.49. At first, this massive surge from spring 2020’s lows continued into 2021. On 16 February, ARKK’s share price hit its all-time intra-day high of $159.70. That’s 4.6 times its 2020 low, an unbelievable return of 360% in 11 months. Wow.

However, this stratospheric ETF has since come plunging back to earth. As I write, it stands at $100.93, down almost $59 from its February peak. That’s a collapse of almost two-fifths (-36.8%) in under 10 months. So, has Cathie Wood turned into Cathie Woodford, or would I back her inspiring vision today?

Why this ETF is not for me

I don’t own any ARKK units and I wouldn’t buy at current price levels. Why? Simply because the ETF doesn’t fit my risk profile as an older, income-seeking investor. This ETF is aimed at growth investors with a high tolerance for risk and volatility.

Also, although this fund has net assets of almost $21.4bn, it remains highly concentrated. Although Cathie Wood aims to have 35-55 stocks in her fund, the top 10 account for more than half (51.5%) of total assets. Furthermore, as these major holdings are almost all US tech/growth stocks, the fund has a high degree of correlation risk. In other words, its holdings often move in sync. That helps to explain why the fund is down almost a fifth (-18.8%) this calendar year. Lastly, most of AARK’s holdings are unprofitable companies promising ‘jam tomorrow’. And with interest rates poised to rise next year, that model could be a problem for ARKK investors.

Then again, I could be wrong. With such an intensive portfolio, Cathie Wood and ARKK might conceivably bounce back. For example, if euphoria were to return to markets, driving tech stocks ‘to the moon’ (via higher valuations) again. Still, whatever happens, I expect ARKK to be similarly volatile in 2022!

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Contrarian thinker

Cathie Wood has shown herself to be unafraid of going against popular investing opinion. In fact, she’s gone on record as saying that the “most exciting times” are when she’s on the receiving end of criticism. Her controversial early investment in US electric vehicle pioneer Tesla is a great example of this. 

As one might have guessed, the fund benefited hugely from this early call when Tesla multi-bagged in value last year. Since then, it’s come off the boil (fuelling further criticism of Wood’s strategy). However, it’s still the top holding in ARK Innovation.

Wood’s conviction is something I’ve tried to apply to my own investing. While I still don’t feel comfortable holding stock in Tesla directly, I do think it’s important to regularly evaluate the consensus view on any stock. In fact, this is essential if I’m to beat the market. I can’t generate better results than the herd if I’m doing exactly the same thing as the herd. Of course, stock-picking also raises the potential for me to underperform as well. 

Embrace disruption

The world is in a constant state of flux. Everything changes and nothing lasts. Rather than fight back against this, Cathie Wood embraces it. Linking in with her purchase of Tesla, she is a huge fan of disruptive companies — those that shake the foundations of an industry and change it for the better. As she puts it: “In a world driven by disruption, be on the right side of change.“

Although I can’t say that all of the stocks I own are disruptive, I do recognise the importance of looking ahead rather than in the rearview mirror. After all, a company’s past performance is no guarantee of future returns. It’s not hard to come up with examples that are now shadows of their former selves. Think mobile phone makers Nokia and Blackberry being impacted by the arrival of Apple.

So, when I’m investing in a specific stock, I regularly ask: “Will this company still be around in 5-10 years and, if so, will it be worth more than it currently is?” If I’m not at least cautiously optimistic, I don’t buy. 

Expect market corrections

Despite being very bullish on technological progress, Wood is experienced enough to know that the fund’s value, and stock markets in general, will never go up in a straight line. In fact, the former is down 10% in the last six months. Regardless of the reason, she knows that downturns are inevitable and, again, embraces them, saying: “Corrections are good, they keep us all humble.” 

Cathie Wood walks the walk too. When Tesla slumped back in February, she bought more of the stock. I’ve tried to do the same with my own investments, particularly during the coronavirus crisis.

This isn’t easy. However, I try to remind myself that, despite being volatile, equities have delivered the best gains of any asset class over the long term. This is the risk/reward trade-off. It’s one I — and clearly Cathie Wood — think is worth signing up for.

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The ARKK stock price explodes and then implodes

ARK Investment Management specialises in buying companies that display ‘disruptive innovation’. By their very nature, these businesses are modern, highly tech-enabled firms seeking to dethrone incumbent players. The ARK Innovation ETF is the group’s flagship fund, with net assets of $23.1bn at end-April. Typically, ARKK holds 35 to 55 stocks, heavily concentrated in the communication, healthcare, technology, and consumer-cyclical sectors. This ‘future focus’ has sent the ARKK stock price shooting skywards.

From roughly five years ago (18 May 2016) to 19 February 2020, the ARKK stock price exploded from $18.31 to $60.37. That’s a near-230% surge, easily thrashing the S&P 500 index’s 64% gain. But as Covid-19 spread worldwide, the ETF’s shares plunged. On 18 March 2020, they had crashed to $34.69, collapsing by three-sevenths (42.5%) in a single month. That slashed the gain since May 2016 to below 90%. Ouch.

ARKK goes nuts in 2020/21

The recovery of the ARKK stock price since March 2020 has been a biblical comeback worthy of Lazarus. Today, the stock stands at $109.72, more than triple (+216%) its March 2020 low. $1,000 invested in ARKK at the low is now worth $316. Then again, the ARKK stock price went much higher earlier this year. On 12 February, it peaked at $156.58, but has since tumbled. Over the past three months, this hot stock has crashed by three-tenths (30%).

Remarkably, investors buying ARKK on 18 May 2016 and selling at the February 2021 top would have made a 736% return in under five years. After recent weakness in the ARKK stock price, that return has been cut back to 499%. This still massively exceeds the S&P 500’s 105% gain over the same period.

Three lessons for investors

First, like mythical Icarus, the highest-flying shares often fall fastest to earth. When financial gravity finally takes hold, yesterday’s stars frequently become today’s dogs. Likewise, when market bubbles burst, declines can be both sudden and dramatic. With inflation (rising prices) and interest rates seen going higher, the future ARKK stock price is unlikely to resemble its spectacular past.

Second, the crazy performance of the ARKK stock price has been built on the back of highly concentrated bets on key companies and sectors. While such intensive investing can produce spectacular returns, it can also be disastrous when stock prices and liquidity nosedive.

Third, almost all fund managers with meteoric performances eventually crash back to earth. It happen to Bill Miller at Legg Mason and to Neil Woodford in the UK. Even Warren Buffett’s Berkshire Hathaway has underperformed the S&P 500 in recent years. Hence, Cathie Wood might well become the latest in a long line of fund managers to be humbled by Mr Market’s fickleness.

Finally, would I invest in ARKK at the current share price? No, because I’m an old-school value investor, so this go-go growth fund’s stock isn’t for me.

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