Cathie Wood’s ARK stays the course, betting big on innovation

Cathie Wood's ARK Investment Management LLC is snapping up more shares of largely unprofitable companies, doubling down on a bet that many traders and investors expect to be tested this year by rising interest rates.

Over the past two weeks, Ms. Wood's flagship ARK Innovation exchange-traded fund has bought more than $400 million of high-growth stocks, including Roblox Corp., Block Inc. and Robinhood Markets Inc. That's according to the firm's daily trading logs and stock-pricing data as of Friday. She says the companies, which span videogaming, digital payments, trading and other industries, have the potential to change the world. 

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Shares of Roblox, Block and Robinhood are down at least 25% each over the first six weeks of the year. More than half of all of the stocks in the ETF, which goes by the ticker ARKK, are down 20% or more in 2022, according to FactSet.

ARK was among the big winners of the pandemic era, which featured big gains in shares of many unprofitable companies and cryptocurrencies, such as bitcoin, as a result of low interest rates and extensive stimulus. Investors in these assets are now facing a rising interest-rate environment that stands to be much less forgiving to unprofitable firms or those trading at high valuations.

That doesn't bode well for Ms. Wood and her ARK funds, analysts said. When rates are low, companies often are freed to spend more on investing in their businesses and reduce the amount they spend servicing debt. Higher rates push up borrowing costs and potentially delay profitability.

"Aggressive growth stocks are naturally disadvantaged when rates are rising," said Robby Greengold, an analyst with Morningstar. 

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The ARK Innovation ETF is down 24% this year, matching its decline in 2021. The fund has lagged well behind the broader stock market, which has come under pressure, too. The S&P 500 and Nasdaq Composite have fallen 7.3% and 12%, respectively, in 2022 after logging double-digit increases last year.

ARK has largely stuck to its strategy of buying and holding shares of companies it believes offer the greatest potential for change and innovation. Tesla Inc., Roku Inc. and Teladoc Health Inc. were the top three holdings in the innovation fund as of Friday. That is similar to early 2021, when Tesla, Roku and Block were the top three, with Teladoc coming in fifth.

Tesla, Roku and Teladoc are all down at least 19% in 2022, partly reversing large gains in 2020 when the pandemic turned them into stock-market darlings. 

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There have been some changes to the innovation fund, too. Zillow Group Inc., for example, was a top 10 holding last year and ARK frequently added to its position. It eventually unloaded the shares last fall, after the company said it was exiting the home-buying space following substantial losses.

A spokeswoman for ARK referred to recent videos by Ms. Wood highlighting the firm's strategy and take on market conditions.

"Today, we are still seeing things very differently from many others out there, particularly when it comes to inflation and interest rates and most importantly, innovation," Ms. Wood said in a video to investors this month.

Ms. Wood added that a rise in Treasury yields to 3% would be more of an issue for mature growth companies facing steeper competition rather than the "super growth companies" she favors. She likened the situation to the early 2000s, saying Amazon.com Inc. managed to achieve double-digit annual revenue growth.

"You would've bought that stock all day long as a value investor," Ms. Wood said. "And of course the returns would've been phenomenal. We are in that same place with truly emerging growth right now."

Ms. Wood's message appears to be winning over some supporters. ARKK has gotten $350.8 million of net inflows over the past week, including more than $300 million on Thursday, its biggest single-day inflow since June, according to FactSet.

But Ms. Wood's detractors remain.

Bearish bets against ARKK account for nearly 16% of the fund's shares, according to data from S3 Partners. That is down from a peak of 17.3% in mid-January, but well above levels over most of the fund's lifespan.

Besides that, an ETF designed to track the inverse of ARKK's performance, the Tuttle Capital Short Innovation ETF, has taken net inflows of nearly $200 million from investors so far this year, pushing assets to $309.8 million, according to FactSet data. The ETF, which goes by the ticker SARK, is up 24% in 2022.

"There's demand out there to be short ARKK," said Matthew Tuttle, chief executive of Tuttle Capital. "We look at this as a better way to hedge your portfolio."

Ms. Wood called the rollout of ETFs such as SARK "interesting" in her video before reiterating her view that disruption shouldn't be underestimated.

"I think history tells us not to bet against innovation," she said.