Cathie Wood’s ARK test faces the technical rally

Known as “Mamma Cathie” by individual investors on Reddit’s WallStreetBets forum, Ms. Wood presents in videos and podcasts her strategy for investing in what she calls disruptive companies – the ones she supports are meant to change the world and grow extraordinarily. Her bets range from investor favorites, such as Apple Inc.

and Tesla Inc.

pandemic winners like Roku Inc.

and Square Inc.

to the little-known 3D printing company Stratasys Ltd.

and the Israeli therapeutic company Compugen Ltd.

CGEN 1.65%

Those games of chance bore fruit last year, when Tesla jumped by more than 700%, Square added 325%, and Roku grew by almost 150%, helping ARK ETFs more than double. Ms Wood has gained wide appreciation as the strongest stock bidder on Wall Street, but her star has fallen in the past two weeks as long-term interest rates have skyrocketed and investors have largely abandoned trading. with growth.

ARK chief operating officer Tom Staudt said on Thursday that the company was not too concerned about the recent recession, saying it was a short-term market trend rather than the beginning of permanent change. He added that the ETFs worked as expected, and the company’s portfolio managers use volatility to buy stocks that fit their philosophy and appear to be oversold.

Among the factors that aggravate the pain for ARK are a number of highly concentrated positions, including small companies in which Mrs Wood’s company holds a significant share of the stock. Rising investors are also taking short positions to bet that ARK’s funds and some of its holdings will continue to decline.

The following diagrams help illustrate those dynamics:

Of the 164 shares held in the five ARK funds, 139 fell in the last month, according to daily data compiled by Dow Jones Market Data. This is much worse than the S&P 500. Less than half of its components fell in the same period.

ARK has held considerable positions in many companies that were considered winners during a Covid-19 pandemic last year. But a number of stocks held by ARK generate little or no profit, including Roku and Teladoc Health Services Inc., as well as electric vehicle manufacturer Workhorse Group. Inc.

and Stratasys.

Analysts, including those from Goldman Sachs Group Inc.

noted that the shares of unprofitable companies were some of the most affected by the recent sale and advised investors to limit their exposure to such shares. The declines so far have led to a decline in the shares of the ARK flagship fund to its lowest levels since the end of November.

Tesla is ARK’s largest position in three of its funds, reaching around 10% of the assets of those ETFs. ARK has a 10% limit for its fund positions. In all five ETFs, Tesla accounts for 7% of assets. Square, Roku, Teladoc and the bitcoin cryptocurrency are among its other major holdings.

Michael Purves, chief executive of Tallbacken Capital Advisors, said he was warning investors about investing in individual holdings in the innovation fund, as many are smaller stocks that could be prone to large fluctuations.

“You don’t have to be in the ARKK to be hurt by the ARKK situation,” Mr Purves said of the innovation fund.

Among ARK’s five funds, 26 of its positions are in companies in which the company holds more than 10% of all outstanding shares, according to company data, FactSet and Dow Jones Markets Data.

Most of these stakes are in small companies with market values ​​below $ 5 billion and fewer shares available for open market trading.

“You have to think about the impact on the market that you make with small capitalization,” said Elisabeth Kashner, director of fund research at FactSet. “If the market prices of some of these less liquid securities have risen fairly quickly, they may then be reduced by the same rate at which funds flow.”

Investors are also getting better at ARK funds, creating a knock-on effect felt throughout the portfolio, said William Kartholl, director and head of ETF trading at Cowen. Inc.

Short interest rates as a percentage of the total volume of the ARK innovation fund have risen to about 11% since Thursday, the highest level ever, according to S3 Partners. Investors are also increasingly getting rid of ARK’s Genomic Revolution ETF, with short interest rates rising to 8% of its total value from less than 3% at the end of last year.

When investors have a short ETF, the shares are created by specialized investment firms known as authorized participants solely for the purpose of the loan. This process involves authorized participants shortening the fund’s underlying shares, which could add to the short interest rate of some of ARK’s holdings, Mr Kartholl said. This could lead to increased volatility of individual stocks, he added.

ARK positions of significant short interest include Workhorse Group and biotechnology firm Beam Therapeutics,

BEAM -1.21%

both at about 20%, according to S3 data. Shares of Workhorse, which was briefly a target of Reddit day traders during GameStop Body.

GME 4.07%

saga, have dropped 66% in the last month, while Beam has dropped 38%.

—Ken Jimenez and Gunjan Banerji contributed to this article.

Write to Michael Wursthorn at [email protected]