By David Randall and Lewis Krauskopf
NEW YORK (Reuters) – The steep slowdown in momentum shares over the past week has been particularly painful for ARK Invest’s Cathie Wood, the highest inventory picker of 2020.
The $26.6 billion ARK Innovation ETF, which analysts say is beloved by retail buyers, is down practically 11% over the past week, practically 10 occasions the slide within the benchmark , as firms in its portfolio, like Tesla (NASDAQ:) Inc, have stumbled. The fund has massive positions in so-called momentum shares, which have a tendency to draw buyers primarily based on thematic tendencies slightly than fundamentals or valuation.
“It’s a reminder for some investors that ETFs that can go up more than 100% in a year can come down just as hard,” mentioned Jimmy Lee, chief government officer of Wealth Consulting Group, who has invested within the fund for some shoppers of his Las Vegas-based agency.
ARK’s Innovation fund efficiently rode a wave of momentum investing in the course of the pandemic, posting positive aspects of 144% and attracting $14.84 billion in inflows over the previous 12 months, in line with Lipper knowledge. It was the highest performer amongst all actively managed U.S. fairness funds, in line with Morningstar.
Still, headwinds are rising for some of the fund’s holdings. Benchmark 10-year Treasury yields are close to 1-year highs as buyers more and more place for sooner U.S. development, placing strain on momentum shares by means of larger rates of interest.
Wood, who’s CEO and chief funding officer, appeared to counsel this might show to be an impediment in a Feb. 17 interview on CNBC.
“If rates were to take a sharp turn up, then we would see a valuation reset and our portfolios would be prime candidates for that valuation reset of course,” she mentioned.
Still, Wood added to positions in Tesla on Tuesday, in line with a Bloomberg interview.
Wood based the agency in 2014 to concentrate on modern firms after working as chief funding officer of thematic portfolios at AllianceBernstein (NYSE:) and a co-manager of world portfolios at Tupelo Capital Management. The agency shot to prominence over the past 12 months on account of its efficiency and inflows.
Some buyers, nevertheless, fear that the fund’s inflated measurement might assist speed up a broader market sell-off.
A rash of previously high-flying bets turning bitter may speed up a unfavorable suggestions loop within the fund’s holdings, given its massive positions and widespread recognition, Peter Garnry, head of fairness technique at Saxo Bank, mentioned in a latest analysis notice.
The fund might also be delicate to declines in cryptocurrencies corresponding to bitcoin regardless of having no direct hyperlink, “indicating vaguely that they do respond to the same risk drivers and thus might be owned by the same investors,” he mentioned.
tumbled practically 14% on Tuesday and is down practically 20% from the report excessive it hit Sunday. The ARK Innovation fund fell 3.3% on Tuesday, outpacing the 0.5% decline within the index.
Wood was unavailable to remark to Reuters.
Some elevated shopping for of protecting choices contracts may mirror the fund’s practically 26% rally for the 12 months by means of Feb. 12 as buyers sought to hedge their positive aspects, mentioned Christopher Jacobson, an derivatives strategist at Susquehanna Financial Group.
At the identical time, Jacobson mentioned that some buyers could also be positioning for a decline in momentum shares favored by retail buyers.
Todd Rosenbluth, head of ETF and mutual fund analysis at CFRA, mentioned ARK Innovation’s standing as an actively managed fund lessens any market-wide affect from redemptions.
“There is risk that some of the money that flooded in early in 2021 based on triple-digit gains in 2020 will be short-lived. However, we think ARK can manage its cash flow and use the liquidity of some of its large-cap positions to mitigate the impact,” he mentioned.