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By David Randall and Lewis Krauskopf
NEW YORK (Reuters) – The sharp slowdown in momentum stocks last week has been particularly painful for ARK Invest’s Cathie Wood, the top stock picker of 2020.
Loved by retail investors according to analysts, the $ 26.6 billion ARK Innovation ETF is down nearly 11% over the past week, nearly 10 times the benchmark decline seen by companies in its portfolio like Tesla (NASDAQ 🙂 Inc have stumbled. The fund has large positions in so-called momentum stocks that attract investors based on thematic trends rather than fundamentals or valuations.
“It’s a reminder for some investors that ETFs that can go up more than 100% in a year can fall just as much,” said Jimmy Lee, chairman of the Wealth Consulting Group, who has invested in the fund for some of our clients his Las Vegas-based company.
ARK’s innovation fund has successfully seen a surge of moment investing during the pandemic, which, according to Lipper data, has seen growth of 144% and inflows of $ 14.84 billion over the past 12 months. It was the top performer among all actively managed US equity funds, according to Morningstar.
However, headwinds are growing for some of the Fund’s holdings. Benchmark Treasury 10-year yields are near 1-year high as investors increasingly look to faster US growth and pressure on momentum stocks with higher interest rates.
Wood, CEO and chief investment officer, appeared to indicate in a Feb.17 interview on CNBC that this could be an obstacle.
“If interest rates went up sharply, we would see valuation revaluation and, of course, our portfolios would be the prime candidates for that valuation revaluation,” she said.
Wood added positions at Tesla on Tuesday, according to a Bloomberg interview.
Wood founded the company in 2014 to focus on innovative companies after serving as chief investment officer, thematic portfolios at AllianceBernstein (NYSE 🙂 and co-manager, global portfolios at Tupelo Capital Management. The company has grown in importance over the past year due to its performance and inflows.
However, some investors fear that the oversized fund could help accelerate wider market sell-offs.
A spike in what were once high-flying bets going sour could hasten a negative feedback loop in the fund’s holdings, as Peter Garnry, head of equity strategy at Saxo Bank, recently researched on his large holdings and widespread popularity pointed out.
The fund may also be sensitive to declines in cryptocurrencies such as Bitcoin, although there is no direct link, “which vaguely suggests that they respond to the same risk drivers and therefore may belong to the same investors,” he said.
fell nearly 14% on Tuesday and is down nearly 20% from Sunday’s record high. The ARK Innovation Fund fell 3.3% on Tuesday, outperforming the index’s 0.5% decline.
Wood was not available to comment on Reuters.
Some increased purchases of protection option contracts could reflect the fund’s nearly 26% rally for the year ended February 12, when investors looked to hedge their profits, said Christopher Jacobson, derivatives strategist at Susquehanna Financial Group.
At the same time, Jacobson said some investors may be positioning themselves for a decline in retail investor-favored momentum stocks.
Todd Rosenbluth, director of ETF and mutual fund research at CFRA, said ARK Innovation’s status as an actively managed fund reduces the market-wide impact of redemptions.
“There is a risk that some of the money that flooded in early 2021 due to triple-digit gains in 2020 will be short-lived. However, we believe ARK is managing its cash flow and leveraging the liquidity of some of its large-cap companies may positions to mitigate the impact, “he said.