In a stunning reversal of fortunes, and a stark reminder of the value of diversified portfolios, tech-themed exchange-traded funds (ETFs) have been among the biggest losers of 2022.
The ARK Innovation (ARKK) fund is set to have its worst year on record. As of mid-December, the fund has lost approximately 63% of its market value, becoming one of the worst-performing U.S. mid-cap funds in its category.
Even while the S&P 500 made modest gains in the final quarter, ARKK has continued to track southward, missing out on the brief rally that brought investors some relief in recent weeks. ARKK is heavily invested in the kind of unprofitable, high-multiple growth equities that exploded during the tech boom but plummeted in this year's bear market.
Tesla, which makes up 9.2% of ARKK's holdings, has seen its price fall precipitously over the year amid rising competition in the EV market and fears that China's zero-COVID lockdowns threaten supply. The deepening crypto winter, meanwhile, has hurt Coinbase, which makes up 4.2% of ARKK's assets.
The fund is also weighed down by large holdings in unprofitable firms. Roku, Teladoc Health, Block, and Shopify – all in the fund's top ten holdings – continue to operate in the red.
The fund's manager, Cathie Wood, is known for her bullish stance on companies in the technology and healthcare sectors. Wood has also been a vocal advocate for the potential of disruptive technologies such as artificial intelligence, robotics, autonomous vehicles, and virtual assets.
Last month she signaled she is not backing down from her earlier prediction that Bitcoin could reach $1 million at the turn of the next decade.
Coming up Short?
While 2030 remains a long way off, in 2022, the winning strategy has been to bet against disruptive technology, which is just what the AXS Short Innovation ETF (SARK) has done. As its name suggests, this fund inverts ARK's positions by shorting its holdings. It has done exceptionally well this year – up around 63% year to date.
Yet these gains haven't stopped the creators of SARK – AXS Investments – from offering the opposite play too. In May, the asset management firm launched the AXS 2X Innovation ETF (TARK), a leveraged ETF designed to double the returns of ARKK.
“The one thing people will agree on is that's an ETF that's going to move and it's going to have large moves,” AXS Investments managing director Matt Tuttle told CNBC earlier in the year. “So we wanted to give investors that tactical ability to play both sides.”
The plight of ARKK shows how far investor sentiment has reversed over the last twelve months. In 2020, ARKK racked up returns of over 150%, while the S&P 500 index returned approximately 16%. Its heavy weighting in tech and healthcare companies brought significant gains that year as the pandemic fueled demand for innovative products and services. Yet this year, amid geopolitical conflict, rising inflation, and tightening monetary policy, investors have retreated to the shelter of defensive assets.
With the vast majority of CEOs anticipating a recession in 2023, the outlook is unlikely to favor aggressive tech funds like ARKK. Yet tech bulls may see the market retreat as an opportunity to buy up ARK at a heavy discount and wait for the bulls to return.
The variety of funds that track ARKK gives investors more options for 2023 – either short, buy, or double down on ARK.
ARKK is currently sitting around $32 with an expense ratio of 0.75%. SARK is presently trading around $66 and has an expense ratio of 0.75%. TARK is swapping hands at about $45 and has a 1.15% expense ratio.
This article was produced and syndicated by Wealth of Geeks.