In the past month I have heard the ARK Innovation ETF (Nasdaq: ARKK) referenced more times than normal (previously I had not heard of this of this ETF at all), especially by what can politely be considered less than sophisticated retail investors, which piqued my interest.
It’s probably due to the fact that it is up 150% in 2020. The fund did have a peak-to-trough from February 2020 to March 2020 (during the COVID crisis) of 43%.
I’m guessing the logic goes – the fund was up big-time in 2020, so it’s clearly the best thing to invest in! Plus it invests in innovation, the hottest sector in the market! How can this go wrong?
We examine the holdings (snippet below are holdings over 1% in the fund):
This is like a laundry list of all the high-flyers. I’m surprised they don’t have a position in Bitcoin!
Momentum creates momentum – the demand will eventually peak out and then watch out below as the reverse happens.
A potential case scenario for lasting survivors will be something like what happened with Cisco Systems (Nasdaq: CSCO) – it flew in 2000 to be the highest capitalized company on the Nasdaq and traded at a P/E of over 100. The company fundamentally was sound, but the stock was horrifically overvalued. It crashed 75% over their March 2000 peak one year later. Fast forward to 2020, they are still around and making a ton of money – indeed, they are one of the saner-valued companies on the stock market, albeit they are no longer in a growth industry!
They are still about 40% below their March 2000 peak.
Going back to ARKK, it’s another soft data point about how bubbly the demand fever is for “innovation” stocks. 20 years ago it was called technology!