Cathie Wood, founder of ARK Investment Management
Courtesy of ARK Invest
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ARK Invest’s fervent exchange-traded funds suffered a major setback this week.
In its worst week since last March, the company’s flagship product, $ 24 billion
ARK Innovation
exchange-traded fund (ticker: ARKK) fell 14.6%, as some of its main holdings – including
Tesla
(TSLA) and
Roku
(ROKU) – fell sharply. THE
S&P 500,
meanwhile, it fell 2.4%.
An improvement in the economic outlook – which could lead to higher prices and higher interest rates – caused stocks to fall this week, especially those of the highest-flying technology companies. At its peak on February 12, ARK Innovation rose 26% in 2021, against 5% for S&P. At the end of the month, ARK Innovation rose 4.7% and S&P rose 1.5%. Investors plucked more than $ 1 billion of ARK ETFs on Wednesday and Thursday, the biggest net outflows in the company’s seven-year history and a sharp reversal from previous weeks. The funds have registered inflows of $ 16 billion so far this year.
As the Wall Street saying goes, when the ducks are quacking, feed the ducks. Fund companies have taken note of ARK inflows and have launched similar, specialized ARK funds that focus on innovative and disruptive companies.
Cathie Wood, the economist who founded ARK Investment Management, is a thoughtful observer and an excellent stock selector. But ARK’s phenomenal rise is due to more than skill: five of ARK’s seven ETFs returned more than 100% last year, a historic anomaly. Returns like this attract hot money from people who rush to a “right thing” and sell as soon as the stock falters – hence the $ 1 billion outflow in two days.
Fidelity launched a set of six actively managed interruption funds last April. Five are focused on specific areas such as automation, communications, finance, medicine and technology; 1,
Loyalty Disruptors
(FGDFX), covers the five themes. In all, the suite has $ 558 million in assets; year-to-date, they increased by 3.3%, on average.
Its interruption funds employ a new time-based fee model. Annual rates start at 1%, drop to 0.75% after one year and 0.5% after another two years. “The overall objective is to encourage investors to invest in the long term,” says Chris Peixotto, vice president of Fidelity’s investment product group. This makes sense especially for disturbing funds, which can be volatile and take years to run out.
The $ 421 million
Goldman Sachs Innovate Equity
The ETF (GINN), launched in November, tracks an index of almost 500 stocks – about 10 times more than ARK Innovation. This lack of concentration and active management makes this ETF look much more like the broad market, with top stakes, like
Alphabet
(GOOG),
Nvidia
(NVDA), and
the Facebook
(FB), none of which are part of the ETF ARK Innovation. The Goldman Innovate ETF returned 4.8% this year.
The $ 181 million
Direxion Moonshot Innovators ETF
(MOON), also launched in November, is probably the fund most similar to ARK. It has only 50 shares, but unlike most ARK ETFs, it is not actively managed. Instead, it tracks an index that uses natural language processing to review company records, identify comments related to innovation and select companies at an early disruptive stage. The fund grew 34% this year.
O $ 1.1 billion
Invesco NASDAQ Next Gen 100
ETF (QQQJ), a mid-cap version of the popular
Invesco QQQ Trust
(QQQ), was a huge success when it was released in October. It tracks the 101st to the 200th largest “promising” company listed on Nasdaq, primarily in technology and other innovation-oriented industries. Many of today’s mega names have already been in the basket of the next generation. The fund is up 7.1% this year.
All of these innovation funds fell last week, but none saw the kind of output that ARK saw. Perhaps being the first to act is not always an advantage.
Write to Evie Liu at [email protected]