As Cathie Wood’s ARK Innovation (ARKK) ETF crumbles, is it a buy?

Cathie Wood’s Ark Innovation Fund (ARKK) is crumbling as most of its biggest cheerleaders jump ship. Its stock’s total return has plunged by over 18% this year alone while the SPDR S&P 500 (SPY) and Invesco QQQ (QQQ) have risen by 5.8% and 2.87%, respectively.

The same performance has happened in the past five years as the fund has crashed by 8.7% while the other two have risen by over 85% and 128%. This is such a poor performance for a fund that has an expense ratio of 0.75%.

The Ark Innovation Fund has crumbled as some of its biggest constituent companies go through a prolonged meltdown. Tesla shares have plunged by over 40% this year and the situation could get worse after it publishes its financials on Tuesday.

Tesla is not the only big technology company that has crumbled this year. Zoom Video, which became a popular name during the pandemic, has now tumbled to a record low, bringing its market cap to about $18.3 billion.

Zoom Video is going through challenges as the number of people and companies using its platform fall. Also, there are concerns about the rising competition from the likes of Microsoft Teams and Google Meet. 

I believe that many companies often select a video platform that is part of their ecosystem. For example, companies using Google Cloud will often prefer Google Meet. Similarly, companies in Microsoft’s ecosystem will often use its video platform.

Roku, the other big company in the Ark Innovation Fund has tumbled by over 34% this year as the company’s growth fades. While Roku was a fast-growing streaming company, the reality is that the industry has matured. It also retreated after a big cyberattack affected over 576k accounts.

Meanwhile, Unity Software, a leading player in the gaming industry has slumped by over 43% this year as the management struggles to engineer a turnaround. Othe top laggards in the ETF are companies like Roblox, UiPath, Intellia Therapeutics, and PagerDuty. 

I have been an opponent for Ark Innovation Fund for a long time, as you can read here and here. The easiest reason for this criticism is that the ETF is highly expensive, with its expense ratio of 0.75% being higher than SPY’s 0.06% and QQQ’s 0.25%. For such a high fee, you would expect stronger performance.

Also, judging by their historical performance, investing in traditional ETFs like SPY and QQQ has always been a winning approach. While these ETFs go through bear markets such as during the Global Financial Crisis (GFC), history suggests that they always bounce back. 

ARKK inflows and outflows

There are signs that investors are giving up on Cathie Wood. As shown above, the fund has shed assets in the past five months straight. It has also had net outflows of over $1.7 billion in the past 12 months.

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