Breakingviews: ARK fund transparency is no escape from volatility

Risk-taking is a two-edged sword. ARK Investment Management is the nearest thing in the world of exchange-traded funds to so-called meme stocks like GameStop. The ETF provider founded by Cathie Wood collected inflows larger than BlackRock’s non-iShares products in January, according to Morningstar Direct. Wood’s focus on disruptive trends and bets on companies like electric-car maker Tesla are the heart of ARK’s appeal. But recent volatility in the company’s ETF valuations shows those characteristics aren’t a great fit with instant redemptions.

ARK’s flagship fund, the ARK Innovation ETF, is up more than fivefold since its founding in 2014, trouncing a Nasdaq Composite Index gain of nearly three times. The past month, however, has been painful. ARK’s biggest fund is off by about a quarter even after Tuesday morning’s rebound.

For retail investors, Wood’s funds offer unusually concentrated bets on companies at the technological frontier. “We invest solely in disruptive innovation” is ARK’s claim. The money manager had over half its portfolio in 20 stocks based on filings at the end of last quarter, with over 7% in Tesla, a stock that’s down nearly 30% in the past month. Other large holdings included Roku and Teladoc Health. ARK’s total assets at the end of 2020 totaled $58 billion.

Wood’s futuristic bets benefit when investors are optimistic, but they’re also vulnerable. Hence the big drops in ARK’s ETF values. Moreover, some holdings may make them difficult to unload without amplifying losses. ARK has over 15% stakes in 15 companies at the end of last quarter, only two of which are expected to be profitable this year according to Refinitiv estimates.

Investors can sell ETF holdings any time. They pulled nearly half a billion dollars from ARK’s flagship product on Feb. 22, according to Refinitiv. That process has encouraged Wood to adjust her holdings. She has sold larger, liquid stocks and bought harder-hit ones. On March 5, for example, ARK sold Alphabet and Roche while buying DraftKings and Teladoc.

ARK’s daily trading disclosures help show Wood’s continued confidence in these firms. That may steady some selling episodes, as long as investors have confidence in Wood. If speculative fervor goes into reverse, it will raise the question of whether such long-term bets are sensibly compatible with a vehicle that can be traded every second of every day.