Cathie Wood’s ARK Finds Gains and Pain in Money-Losing Companies

More than half of the companies in

Katie Wood.

Five of Ark Investment Management LLC’s most popular exchange-traded funds posted losses over the past year, a feature that analysts say will likely lead to increased volatility in these funds in the months ahead.

Of the 165 stocks in actively managed ARC ETFs, 85 have suffered net losses in recent years, according to an analysis of Dow Jones market data. This has made funds particularly vulnerable to sharp swings, as investors shift from growth stocks to stocks that shine when the economy is booming.

Despite the rally in tech stocks this week, all five ARC ETFs remain at least 14% below their mid-February highs, followed by the Nasdaq Composite, which is 5% below its February 12 high. February is.

Performance of five actively managed ARC ETFs

 

This pain was felt most strongly in the shares of unprofitable ARC funds. These stocks have fallen an average of 18% over the past month, according to DJMD’s analysis of CRA holdings and FactSet data, while profitable stocks have fallen 8% over the same period.

These stocks are by definition riskier than the general market.

Ben Johnson,

Director of Global ETF Research at Morningstar.

A spokesman for the CRA declined to comment. However, Wood appeared on television and YouTube to reassure her investors that the company is sticking to its strategy.

We are more excited than ever about everything we do. In recent weeks, we’ve done nothing but raise the returns we expect from each of our stocks to the point where they’ve fallen, Wood said in a video posted to YouTube last week that has garnered more than 700,000 views.

ARK’s key positions include a streaming business.

Roku Inc..,

Website for selling houses

Zillow Group Inc.

and music services

Spotify Technology SA,

none of which reported profits in their last annual report. The shares of these and many other loss-making companies are covered by various ARC funds.

Teladoc Health Inc..,

For example, it has stakes in four of the five ETFs, with a combined position of $2.3 billion. The virtual healthcare provider has posted losses every year since its IPO in 2015, including $485 million last year.

Of the 56 shares of the flagship innovation fund, 36 have not generated profits in recent years, according to an analysis of the company’s holdings. ARC Genomics Fund, the firm’s only ETF still in the red this year, is even more exposed to loss-making companies, with 43 of its 57 holdings suffering losses last year. In the other three ARC funds, at least a quarter of the companies represented did not make a profit last year.

Investors have long relied on valuation measures such as price-to-earnings ratios to assess a stock’s prospects. But these indicators are not relevant for companies that do not make profits. Instead, the CRA relies on a mix of fancy models and discounted cash flow models based on near-zero interest rates to justify high valuations for stocks with high growth potential and that are capturing relevant sectors, such as. B.

Alphabet Inc.

Search dominance and the social media gap Facebook Inc.

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Many of the RCAF’s subversive actions went viral during the 2020 Covid 19 pandemic. In the past year alone, the innovation ETF is up more than 150%, tripling since its debut in 2014. An influx of investors followed, allowing ARK to focus even more on the next wave of revolutionary companies.

Another potential danger for ARC investors is the high concentration of funds. For example, the company has 15% of its two funds worth $156 million in a biomedical products company.

Serus Corp.

The company has not been profitable for more than a decade and recently announced an annual loss of nearly $60 million.

The more an investor owns a particular stock, the harder it is to add or sell shares without price movement. Morningstar analyzed the numbers and found that if ARK decided to sell its Cerus shares, it would take more than 52 trading days to fully exit its position and avoid a significant change in the stock price to the detriment of its own investors.

Cerus shares fell 13% last month. The buybacks appear to have led to the sale of ARC funds between 22. More than two million shares were dumped in February and Wednesday, according to Cathiesark.com, which tracks CRA trading activity, which could add to Cerus’ downfall.

This is the biggest concern in portfolio management, said Saumen Chattopadhyay, chief investment officer of asset manager Carson Group, referring to concentration. When the bubble bursts, that kind of money can get stuck.

The CRA is not changing its approach. CEOs, including Wood, said volatility in the market and in their funds would be short-lived. In recent weeks, the company has sold more liquid shares to buy shares of companies in which it says it has more confidence, including smaller, harder-to-trade stocks and, in some cases, loss-making stocks. Among these purchases, Roku and

908 Devices Inc,

a $1.4 billion chemical analysis company.

Wood said in her video last week that the funds have not experienced any trading or liquidity problems.

We are not in a bubble, she added.

-Ken Jimenez contributed to this article.

Email Michael Wursthorn at [email protected]

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