Why Has ARKK Dropped Over 30% This Year And Where Is It Headed?

Why Has ARKK Dropped Over 30% This Year And Where Is It Headed?

Summary

The Ark Innovation ETF was fallen 60% from its high water mark, far more than 10%ish drop of the handful of growth stocks which top the S&P 500 and NASDAQ100.

Charts and tables for price and AUM show clearly the the majority of investors in ARKK bought at the top; most ARKK holders are deeply under water.

Of ARKK’s 35 holdings 22 have negative cash flow; the others are extremely expensive even after a large decline.

SA Factor Grades are very negative on Momentum, Expenses, Valuation, Dividends, Risks; SA authors are mixed to negative.

If you own ARKK it’s a salvage situation; you should probably look for a dead cat bounce and sell.

Cindy Ord/Getty Images Entertainment “It’s always darkest just before dawn.” – an uplifting proverb with many sources

“It’s always darkest just before it’s pitch black,” – a less uplifting rejoinder

Ark Innovation ETF ( ARKK ) has fallen hard since the beginning of 2022 because its investors have continued to come to their senses. Unfortunately, it is too late for many of them. ARKK is certain to be remembered in financial history as the quintessence of disastrous speculation during the speculative bubble of the early 2020s. In its eight years of existence it is has destroyed more capital for more naive and innocent investors than any other investment vehicle of its time. This judgment may seem brutal and blunt, but there is no substitute for telling the true facts.

Speculative periods of the sort we have recently experienced happen periodically in financial markets. They usually begin with very real innovation which produces changes in the way the economic world operates. A narrative emerges which exaggerates and places a positive spin on innovations of all sorts. In the years leading up to 2000 it was the internet and the dot-com companies which appeared to exploit it. Only a few of these companies survived the 2000-2003 Crash but after twenty years it is easy to remember the few which did with Amazon ( AMZN ) being the prime example. It’s the winners which stick in the popular mind.

Those who bought Amazon early and hung on during the Crash of 2000-2003 have done extremely well. Market legends were built on it. Another popular favorite was Cisco Systems ( CSCO ), which also survived and continued to have good growth in earnings over the decades that followed. Unfortunately for investors who came in around the 2000 peak Cisco’s stock price has not yet recovered its 2000 high. Those who bought Cisco at the bottom of the Crash and added over the following decade have done reasonably well. The success of Amazon serves to obscure the outcome for the majority of investors in dot-com stocks who were wiped out and never returned to the market.

Periods like the present occur when enough time has elapsed from the last such period that most of the investors damaged in the previous market frenzy have disappeared from the scene. After several years of building enthusiasm a new wave of innocents with no memory of the past enter the market. Making money in the market once again looks easy. Vehicles like the Ark Innovation ETF make it look like a piece of cake. Many of the individual stocks held in ARKK looked like long term winners right up to February 2021.

ARKK was the perfect vehicle for a fresh generation of naive investors who overestimated their own competence. Most did not know enough to grasp what they didn’t know. Whether ARKK’s founder, Cathie Wood, understood what the risks were I can’t say. I have no special access to her thinking. The fund made her a household name and also made her a great deal of money. With an expense rate of .75% investors had a substantial hurdle to overcome. Near the top in market prices the Ark ETF management received over $200 million annually taken off the top of Assets Under Management. Don’t cry for Cathie Wood or her chief analyst Brett Minton (pictured above). They did fine.

It’s entirely possible that Cathie Wood herself was simply a true believer who came upon what seemed at the time to be a great idea. There is no question that she is very smart. A summa cum laude graduate of the University of Southern California she was a favorite student of economist Arthur Laffer. She is frequently described as a devout Catholic and in fact named her ETF after the Ark of the Covenant. That’s the same Biblical Ark as in the […]

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