Why Is ARK Innovation Dropping?

Next, they determine the specific companies and industries most likely to lead the change – the ones that have potential to disrupt traditional processes and create new products and services to replace outdated technology. 

There are nine ARK Invest ETFs available at the moment. Eight of those focus on particular areas of technological advancement, including: 

• ARK Autonomous Tech. & Robotics ETF (ARKQ)
• ARK Fintech Innovation ETF (ARKF)
• ARK Genomic Revolution ETF (ARKG)
• ARK Israel Innovative Technology ETF (IZRL)
• ARK Next Generation Internet ETF (ARKW)
• ARK Space Exploration & Innovation ETF (ARKX)
• ARK Transparency ETF (CTRU)
• The 3D Printing ETF (PRNT)

The ninth, known as the ARK Innovation ETF (ARKK), takes a broader look at disruptive innovation. It invests in companies that stand to profit from any of the following: 

• Artificial Intelligence 
• Automation
• DNA Technologies
• Energy Storage
• Fintech Innovation
• Next-Generation Internet
• Robotics
• The “Genomic Revolution”

For example, ARKK’s top holding is Tesla because of its work in autonomous vehicles and energy storage. 

ARK Invest ETFs rose to dizzying heights over the course of the pandemic, and for a time, Cathie Wood was the financial world’s version of a celebrity. Many compared her favorably to Warren Buffett, speculating that perhaps Buffett’s value-based investment strategies had become obsolete. 

Investors, analysts, and members of the media wondered aloud whether the time had come to throw out Buffett’s trading playbook. Rather than focusing on a company’s fundamental financial health, Wood’s followers were ready to adopt her habit of embracing promising – but unproven – disruptive technologies. 

ARK Invest ETFs saw tremendous success for a period, but the last year has been rocky. Investors want to know what is going on with ARK ETFs. Why is ARK Innovation dropping?  And more importantly, will ARKK recover? 

What Is Going On With ARK ETFs?

By any measure, it’s been a rough year for Cathie Wood. After wowing the market with massive returns from March 2020 to February 2021, the ARK Invest family of ETFs has seen negative returns throughout the most recent 12-month period.  

Some analysts suggest that the disruptive innovation bubble has burst, and the single year of astonishing returns won’t be repeated.

Others are confident that disruptive innovation in general – and ARK ETFs in particular – are here to stay, and share prices will be on their way up soon. Those optimists believe that imminent recovery makes now the right time to buy ARKK and other ARK Invest ETFs. 

What Is Happening with ARK Funds?

Ultimately, ARK funds are suffering from a change in economic conditions. These ETFs hold a variety of companies that have grown rapidly, but they are still in the very earliest stages of their development. 

Many of these companies aren’t profitable – yet – but they need funding to move forward with the technological advances that will eventually change the way the world works. Unfortunately, some don’t have cash on hand to cover development expenses without outside help. 

That’s problematic when investors have lost their enthusiasm for unproven companies, and interest rates are coming off their pandemic-related lows. Higher interest rates make it more expensive for emerging companies to borrow money. On top of that, other expenses like raw materials and labor are becoming more costly due to spikes in inflation. 

In short, ARK Invest ETFs grew rapidly when their underlying companies were widely popular. Now that investor interest has waned, and those companies face strong headwinds, the value of ARK Invest holdings has declined – and the value of ARK Invest ETFs has declined alongside that of the underlying holdings. 

Why Is ARK Innovation Falling?

The ARK Innovation ETF made big bets on relatively new tech stocks – the same stocks that are now collectively referred to as “pandemic stocks.”

These companies saw huge gains after the March 2020 market crash, which pushed ARKK returns up sharply. The trouble is that upon release of effective COVID-19 vaccines and a return to semi-normalcy, the pandemic stocks fell, taking ARK Innovation down, too. 

In addition to Tesla, other companies that make up ARKK’s top ten holdings include Teladoc, Roku, Zoom, Coinbase, Unity Software, Spotify, Exact Sciences, Block, and Twilio. Together, these ten make up more than 50 percent of ARKK’s total portfolio.

However, except for Tesla, none of the ten saw much success in recent months. In fact, other than Tesla, none beat the Nasdaq for the most recent 12-month period. 

For the 12-months from early February 2021 to early February 2022, returns for these ten disruptive innovation companies are as follows: 

• Tesla – up 5 percent 
• Teladoc – down 74 percent 
• Roku – down 64 percent 
• Zoom – down 65 percent 
• Coinbase – down 37 percent 
• Unity Software – down 15 percent 
• Spotify – down 47 percent 
• Exact Sciences – down 47 percent 
• Block (formerly Square) – down 60 percent 
• Twilio – down 50 percent 

The other half of ARKK’s portfolio didn’t fare much better. As a result, ARKK stock dropped more than 50 percent in the same 12-month period. 

Is ARKK Overvalued?

It’s safe to say that when ARKK peaked, it was very likely overvalued. The underlying companies held by the ETF were certainly overvalued, as the runaway growth in 2021 was simply not sustainable. Some of the companies in question currently generate very small profits, if they generate a profit at all, and the strong growth they saw during the height of the pandemic wasn’t consistent with a fair valuation. 

With that said, by their very nature, these companies may be poised to take over entire industries in the not-so-distant future. For example, Teladoc may transform healthcare, and by many measures, Block has already disrupted elements of the financial service industry. The changes will take some time to fully play out, but their potential supports their current valuations.

In other words, now that share prices for ARK Innovations’ holdings have fallen to more reasonable territory – and ARKK along with them – ARKK doesn’t appear overvalued. Cathie Wood’s fans are certain that this is a rare opportunity to buy up shares before prices trend upward again. She has said herself over the next 5 years she expects compounded annual growth rates to approach 40%.

Will ARK ETFs Recover? 

ARK Innovation isn’t interested in the big tech stocks that are growing rapidly and bringing in exorbitant profits. Companies like Apple, Amazon, Alphabet, and Microsoft drove a large portion of the S&P 500’s 2021 growth, but ARKK and other ARK Invest ETFs didn’t benefit. Without those stocks, it just wasn’t possible for ARKK to beat the market. 

However, the fact that disruptive innovators saw large corrections in 2021 doesn’t detract from their potential to generate profits long-term. The promise that Cathie Wood and her team detected in these companies is still there, and for many, the profits will come. 

Wood is right that technologies like autonomous vehicles, 3D printing, artificial intelligence, and DNA technologies will transform how the world works. It’s just a matter of time. Assuming she selected the companies that will lead those industries, ARK ETFs will recover. 

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