Is an ARK Necessary to Survive the Choppy Market?

“A smooth sea never made a skilled sailor.” -Franklin D. Roosevelt

The stock market seas have been anything but smooth this year. Choppy is the best word I can think of to describe market action, especially in July. All of the broader indices broke through to new all-time highs this month only to pull back sharply and consolidate these gains.

The constant up-down, up-down of the market waves have left even the most skilled investors feeling a bit seasick and searching for calmer seas. Many have even been tempted to board Cathie Wood’s “ARK” for the promise of smoother sailing and safety amidst the everchanging tides. But the reality is that the ARK that Cathie Wood built may be taking on water…

Cathie Wood has become a household name in Wall Street circles, as she built her career as a stock picker and fund manager in several money management firms and hedge funds. In fact, before founding ARK Investment Management LLC, or ARK, Wood served as the Chief Investment Officer (CIO) at AllianceBernstein and co-founded Tupelo Capital Management.

Bloomberg, Fortune, and Market Media have all recognized Wood for her contributions to global finance and business—and she is often asked to speak at economic and investment forums around the world, including the World Economic Forum in 2016 and 2017.

Wood’s investment prowess and more than 40 years of experience inspired her to found ARK back in January 2014. ARK investments are focused primarily on disruptive technologies and innovations like autonomous vehicles, artificial intelligence (AI), robotics, and genomics. Therefore it’s no wonder that Wood is well-known for backing Tesla (TSLA) (even forecasting the company could be valued at more than $1.0 trillion one day).

Now, it’s essential to understand that ARK bundles its stock picks into several exchange traded funds (ETFs). The firm’s flagship ETF, Ark Innovation Fund (ARKK), has approximately $8.6 billion in assets, and it has rewarded shareholders with about 40% gains annually over the past five years.[1] Much of the fund’s recent success can be attributed to its investments in stocks like Tesla, Square (SQ), Zoom Video Communication (ZM), Roku (ROKU), and Shopify (SHOP).[2]

Tesla, as an example, was on an absolute tear in 2020. From the March 2020 lows through yearend 2020, TSLA surged an incredible 877%. TSLA holds the number-one spot at ARK in terms of weighting, as it accounts for approximately 10.5%.[3] It’s not too surprising then that ARKK also soared 272% during the same period in 2020 or that it was the top-performing ETF in the U.S. last year.

However, ARKK may not be on track to claim that title this year. Not only have Tesla shares fallen 26% from their January 2021 highs, but ARKK has also slipped 24% from its mid-February highs.

The reality is that the stalwart technology stocks are back in favor, with the FAANG stocks—Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOG)—all starting to attract investors’ attention again. Even with all the fears surrounding the Delta variant of COVID-19, it seems the world is starting to reopen and resume life as normal as possible. As a result, Wall Street isn’t expecting the innovative and disruptive technology stocks to keep the wind in its sails this year as it did in 2020.

And that’s bad news for Cathie Wood and ARKK.

Like most hot products on Wall Street, Wood attracted new investors in droves. In my opinion, they are buying a packaged product at precisely the wrong time.

I strongly feel that the alternative approach of buying individual securities in a portfolio is far superior. That’s precisely what we do at Nicollet Investment Management.

Take Tesla. Like Wood and her ARKK, we owned shares of Tesla and rode the wave higher. Unlike Wood, we took money off the table when it appeared the valuation was extreme, according to our analysis.

In my view, our strategy allows for far more flexibility than owning an exchange traded fund like ARKK.

As Aristotle succinctly stated: “We must free ourselves of the hope that that the sea will ever rest. We must learn to sail in high winds.”

To be a successful investor, we must learn to navigate through smooth seas and rough waters. The best compass that I’ve found is creating a financial plan and sticking to it.

That’s exactly what we do at Nicollet Investment Management. If you would like to learn more about how a portfolio of individual securities can help you achieve calm and serenity specific to your goals and objectives, please schedule an appointment with me now!

I look forward to hearing from you.

Please click here for important disclosures.

[1] https://www.forbes.com/profile/cathie-wood/?sh=370ae5247360

[2] https://ark-funds.com/arkk

[3] https://cathiesark.com/arkk-holdings-of-tsla

Jamie Raatz