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Cathie Wood's ARK Innovation ETF (NYSEArca: ARKK) has plunged 34% since hitting its all-time high in February. This has been one of the hottest tech ETFs over the last year, soaring over 300% from its 2020 lows to its 2021 highs.
So why is ARKK falling now?
While the Nasdaq might not be performing like the Dow this year as the economy opens back up, it's still up over the past year and only a few percentage points off its all-time high.
But if you looked at one part of tech, and in particular, tech growth stock, you are probably seeing a much different picture, as many of these stocks have retraced their gains over the last few months. We are not just talking about 10% to 15% – we are looking at drops of 50%.
And these are not just tiny, no-name stocks. We are talking about big names like Teladoc Health Inc. (NYSE: TDOC), which is down roughly 50%, Roku Inc. (NASDAQ: ROKU), down 40%, Square Inc. (NYSE: SQ), down 20%, and Tesla Inc. (NASDAQ: TSLA), down 25% from its highs.
The ARKK ETF holds all the stocks I just mentioned, which are actually some of its top 10 holdings.
This pullback has actually pushed Cathie Wood's ETFs down over 30% now.
Now all of the sudden everyone is questioning ARK's strategy.
Is Cathie Wood a tech investing genius, or did she just get lucky last year?
Depending on how you answer that question, ARKK ETF is either a buy opportunity now or something to stay away from.
Here's what the facts say…
Here's Whether the ARKK ETF Is a Buy Now
The big question is whether the thesis has changed on many of these stocks: not at all.
Maybe they ran up too quickly and we are seeing multiples compress as the market got ahead of itself, but ARK is all about investing in future technologies. This is why it invested in Tesla back in 2018, and now it's trading up roughly 1,000% since then.
It sees the same kind of technology progress in many of its other companies. Teladoc is the future of doctors' appointments, Roku is the future of TV, Square is the future of mobile banking, and Tesla is the front-runner in electric vehicles.
The thesis has not changed, and ARK's strategy has not changed either. On CNBC last week, Cathie Wood even talked about liking this setup and that the rotation was good news as the bull market broadens out. On a five-year time horizon, the only thing that has changed is the price.
Let's also not forget about ARK's huge outperformance over 2020. ARKK was one of the top-performing ETFs in 2020, up over 250%. The Dow during the same period was up roughly 60%. It even blew away the tech-heavy Nasdaq composite, which was up around 90%.
We all know that sentiment can change very quickly with price action and even with the current underperformance of ARK. But it does not change its investment priorities.
Cathie's ARK is not sinking. This is only a temporary lull, and she is investing in companies that have fantastic growth rates and are building toward the future. The fact that she is not changing up her strategy just shows how diligent of an investor she really is.
I would continue to watch her funds and as the market continues to re-rate some of the tech growth stocks that she invests in. Looking at some of the big holdings like Roku and Square, it still looks like they could consolidate toward their 200-day moving average. Once we see this happen and we get this coupled with a few green days and rising volume, it could be time to step back in.
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About the Author
Alex Kagin is the Director of Technology Investing Research at Money Map Press. He has spent the last decade working in equity research, most recently with Energy Capital Research Group (ECRG), where he led technology stock research along with working as part of a team developing a customizable financial data platform for securities analysis.
Prior to joining ECRG, Alex spent 8 years at DeMatteo Research, a boutique primary research firm and broker-dealer servicing the institutional investment community. He managed the Tech, Media, and Telecom vertical where he spent time connecting with hundreds of tech executives and hedge funds to get the pulse of the market.
Alex has a B.S. in Economics from American University and previously held Series 7 and 63 security licenses.