The Ark Innovation Fund (ARKK) had a difficult year in 2021 as most of its constituent companies dropped by double-digits. The fund declined by about 40% from its year-to-date high and is hovering near the lowest level since November 2020.
Cathie Wood ARKK Fund tumbles
Cathie Wood is an active rockstar manager who gained popularity in 2020 as her flagship fund, ARKK, rose by more than 100%.
Wood was right that the Covid-19 pandemic would push more investors to technology stocks. As such, she boosted her holdings in companies like Zoom Video, Teladoc, Shopify, and Spotify. As people stayed at home, these companies did well.
In 2021, however, things turned around as investors rotated from lockdown stocks to reopening stocks. Teladoc, its second-biggest holding after Tesla, has dropped by 70.30% from its highest level in 2020. Similarly, Zoom Video stock has fallen by 68% from its highest level in 2021.
Other ARKK companies that have crashed by more than 10% from their highest point this year are Shopify, Spotify, Coinbase, Roku, Twilio, and Unity Software. Most of the biggest parts of the portfolio have fallen by over 50% from their all-time high.
Is ARKK a good investment?
The performance of the Ark Innovation Fund (ARKK) has led to concerns about actively managed funds. For one, while the fund declined by 23% this year, the S&P 500 index rose by 28%. Therefore, investors in the fund have lost double digits while paying an expense ratio of 0.75%. Many S&P 500 exchange-traded funds (ETFs) have an expense ratio of less than 0.05%.
Still, proponents for actively-managed funds like ARKK point to the long-term performance and the fact that Cathie Wood maintains a long-term view of the market.
For example, the fund has risen by about 400% in the past five years, while the S&P 500 has risen by 120% in the same period. The Nasdaq 100 index has risen by 240% in the past five years. That makes ARKK a better investment than the S&P 500 in the long term.
Catalysts for ARKK
While ARKK stock price has struggled in 2021, there are several catalysts that could help it rebound in 2022. First, the sharp decline of stocks in the index has pushed them to extreme oversold levels. A closer look at stocks like Teladoc, Zoom Video, and Roku shows that key oscillators like the Relative Strength Index (RSI) and MACD have moved to extreme levels.
Second, the expectations of some of these companies are also low. A quick look at SeekingAlpha shows that growth expectations of companies like Zoom for 2022 are low. Therefore, there is a possibility that these stocks will report better than expected results in 2022 and propel their shares higher.
Third, a concept known as statistical arbitrage could push the fund higher. This happens when investors rush to buy stocks that underperformed in a year. Finally, while the fund has dropped sharply this year, a look at outstanding shares shows that shareholders have been loyal to the fund.
Ark Innovation Fund stock analysis
The daily chart shows that the ARKK stock has struggled in the past few months. The stock is trading at $97.92, which is about 40% from its highest level in 2020. The fund is below the 25-day and 50-day Moving Averages, while the Relative Strength Index (RSI) is pointing higher. A closer look shows that the fund is trading at the lowest level on May 13th.
Therefore, while more weakness is possible, a rebound in 2022 cannot be ruled out.
