You may have seen the name Catherine ‘Cathie’ Wood pop up on your investing radar over the past year or so. Or perhaps the name of the investment company she runs – ARK Invest. Ms Wood and ARK have attracted some of the most intense investor interest, particularly amongst retail investors, of almost any US fund manager in recent times. ARK’s funds even pop up on the most popular US shares that ASX investors trade from time to time, which the Fool covers most weeks. So who is Cathie Wood and ARK? And why are they now so famous?
ARK is a funds management business over in the United States. Ms Wood is its founder, CEO and chief investment officer. ARK has gained its fame through its suite of exchange-traded funds (ETFs), which specialise in high-growth, future-facing and disruptive companies, usually in the tech space. Ms Wood first rose to fame with her uber-bullish views on some prominent tech shares.
Wood drew a lot of eyeballs a couple of years ago with her unabashedly optimistic views on the electric car and vehicle manufacturer Tesla Inc (NASDAQ: TSLA). Back in May 2019, Cathie Wood surprised even the more bullish investors of Tesla when she spruiked a US$5,905 share price target for the company. At the time, Tesla was a US$40 share (adjusted for last year’s stock split). It was also just before Tesla went on its millionaire-minting run. Over the following year or two, Tesla was to shoot up more than 1,100% in value. The fact that Ms Wood was one of the first investors to come out of the gates with such a bullish price target for Tesla earned her and Ark a lot of respect in hindsight.
Growth at scale
But since the days of calling Tesla’s success, Cathie Wood and ARK also put some pretty convincing runs on the board. Its flagship fund – the ARK Innovation ETF (NYSE: ARKK) – returned an impressive near-40% in 2019, and almost 150% in 2020. ARK Innovation is a fund that incorporates the ‘best ARK picks’ from its other, more sector-specific ETFs. Between 1 January 2021 and 12 February, it added another ~25% or so. That’s enough performance to catch any investors’ eye. Other ARK ETFs performed similarly well, if not better, over these time frames.
But since February 2021, things haven’t been entirely ‘coming up Milhouse’ for ARK funds. The ARKK ETF has corrected sharply since February when it reached its peak of US$159.70 a unit. On today’s pricing, ARKK units are back to US$112.28, giving up more than 28% off of that high.
So is ARK a spent force? Let’s take a deeper dive.
What’s in an ARK ETF?
Here are the top holdings, and their weightings, in the flagship ARKK ETF, as of 27 May:
|ARKK Holding||ETF Weighting (%)|
|Tesla Inc (NASDAQ: TSLA)||10.24%|
|TelaDoc Health Inc (NYSE: TDOC)||6.05%|
|Roku Inc (NASDAQ: ROKU)||5.8%|
|Square Inc (NYSE: SQ)||4.69%|
|Shopify Inc (NYSE: SHOP)||4.17%|
|Zoom Video Communications Inc (NASDAQ: ZM)||4.07%|
|Twilio Inc (NYSE: TWLO)||3.64%|
|Coinbase Global Inc (NASDAQ: COIN)||3.63%|
|Spotify Technology SA (NYSE: SPOT)||3.5%|
|Unity Software Inc (NYSE: U)||3.46%|
As you can see, the fund is heavily weighted to high-growth tech shares. We have Tesla (naturally taking out a large chunk at the top there. But we also have companies like Roku, Square, Shopify, Spotify, Zoom and Coinbase.
These companies are all very similar in nature. They are disruptive, tech-based companies that have long growth runways, and a lot of future potential. But they are also not too profitable today, and still very much in ‘growth phase’. These companies are at the stage of their lives where they are prioritising revenue growth over profitability. That’s why most of them don’t even have price-to-earnings (P/E) ratios yet. Or if they do, they are normally in the triple-digits. Take Tesla. Its P/E ratio is currently sitting at 635.7.
What about some other ETFs?
We see similar patterns in some of ARK’s other popular ETFs.
Here are the top ten holdings for the ARK Fintech Innovation ETF (NYSE: ARKF) fund:
|ARKF Holding||ETF Weighting (%)|
|Square Inc(NYSE: SQ)||10%|
|Shopify Inc (NYSE: SHOP)||5.25%|
|Sea Ltd (NYSE: SE)||4.81%|
|Zillow Group Inc (NASDAQ: Z)||4.68%|
|PayPal Holdings Inc (NASDAQ: PYPL)||4.58%|
|Adyen NV (AMS: ADYEN)||3.42%|
|Pinterest Inc (NYSE: PINS)||3.38%|
|Twilio Inc (NYSE: TWLO)||3.35%|
|JD.com Inc (NASDAQ: JD)||3.35%|
|Tencent Holdings ADR (OTCMKTS: TCEHY)||3.27%|
And here is what the ARK Next Generation Internet ETF (NYSE: ARKW) fund holds:
|ARKW Holding||ETF Weighting (%)|
|Tesla Inc (NASDAQ: TSLA)||10.22%|
|Shopify Inc (NYSE: SHOP)||4.87%|
|Twitter Inc (NYSE: TWTR)||4.72%|
|Square Inc (NYSE: SQ)||4.63%|
|TelaDoc Health Inc (NYSE: TDOC)||4.47%|
|Grayscale Bitcoin Trust (OTCMKTS: GBTC)||4.39%|
|Roku Inc (NASDAQ: ROKU)||3.95%|
|Spotify Technology SA (NYSE: SPOT)||3.86%|
|Twilio Inc (NYSE: TWLO)||3.7%|
|Coinbase Global Inc (NASDAQ: COIN)||3.46%|
Again, very similar businesses – high growth, disruptive, priced for future profitability rather than the money they make today.
So why have ARK funds had a bad few months?
And now we can look at the main problem that these funds face. They tend to do well, really well, when the market is running hot, and growth companies are ‘in vogue’. By definition, growth companies tend to outperform the broader markets during a bull run and underperform during a bear market. 2019, and post-COVID 2020 were decidedly the former.
But why the underperformance since February 2020? After all, the US S&P 500 Index (INDEXSP: .INX) has gone and pushed to more record highs since 12 February. Most recently on 7 May.
Well, another factor at play has been fears of inflation and rising bond yields, which have spiked in the months since 12 February. According to CNBC, the US 10-year Treasury yield was well under 1% at the start of 2021 and was around 1.18% on 12 February. This yield reached a high of roughly 1.75% in late March and still stands at 1.61% today.
Rising bond yields typically turn sentiment against companies who are being priced on future earnings, rather than what they offer today. In other words, most of the stocks that ARK funds hold. We saw similar gyrations in our own ASX tech sector between February and May.
What does the future hold for ARK?
The big corrections in the value of Ark funds over the past few months might have dented some of the optimism that many of its investors would have been feeling in the months and years prior. But if the market was once again to fall back in love with the kinds of future-facing tech companies that ARK invest in, it is conceivable that we will see ARK funds back at all-time highs. Time will only tell. But Cathie Wood and ARK are probably not going away anytime soon regardless – as barometers of high-octane growth stock investing if nothing else.