ARK Invest’s Weak Q2 Could Be Setting Up for Something Big

ARK Invest had some of the hottest exchange-traded funds (ETFs) of 2020, with massive gains across the board. However, keeping up the pace and the year-over-year comps is proving to be tricky. Cathie Wood and company recently released the second-quarter report for the ARK Invest family of funds, and while many of these funds underperformed the in quarter the outlook is very positive.

Many investors are concerned with inflation, but Wood and her analysts believe this is a nonfactor. On the Thursday conference call, she cited recent Consumer Price Index and Producer Price Index data that had investors scared, but her take was that the worst is over. CPI and PPI are lagging indicators, according to Wood, and the understanding is that we are past that.

Wood also pointed to commodity prices settling back down (with the exception of oil), and this should prove inflation to be temporary. For example, lumber prices have dropped more than 57% from their peaks in the second quarter and copper prices are down about 13%.

Another highlight of the report was the rotation trade between growth and value stocks. Overall, ARK thinks that this rotation has broadened and strengthened the bull market, preventing another tech and telecom bubble and likely setting the stage for another leg up in innovation-based strategies. In ARK’s view, the coronavirus crisis transformed the world significantly and permanently, suggesting that many innovation-driven stocks could be productive holdings during the next five to 10 years.

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Again, the longer term outlook is fairly positive, but this quarter was rocky, to say the least. Wood detailed her thoughts on the rotation trade and the longer term outlook:

Among the largest beneficiaries of the rotation toward cyclicals during the past six to nine months have been two sectors that ARK believes will be disrupted the most by innovation during the next five years: Energy and Financial Services. In ARK’s view, autonomous electric vehicles and digital wallets, including cryptocurrencies and decentralized financial services (DeFi) associated more broadly with blockchain technologies, will disrupt and disintermediate both Energy and Financial Services significantly during the next five years.

For the second quarter, practically all of the ARK funds underperformed the broad markets. However, there was one exception. ARK Innovation ETF (NYSEARCA: ARKK) outperformed the broad markets, with its top contributors being Roku and Intellia Therapeutics. The main detractors were Teladoc and Coinbase.

Here’s a look at the rest of the ARK funds:

ARK Autonomous Technology and Robotics ETF (NYSEARCA: ARKQ) underperformed the broad markets. Its main detractors were Virgin Galactic and Workhorse, while its top contributors were 3D Systems and Alphabet. The net asset value (NAV) of the fund is up about 13.3% year to date, while the ETF price is up about 13% in that time.

ARK Next Generation Internet ETF (NYSEARCA: ARKW) underperformed the broad markets as well, with its top detractors coming in as Grayscale Bitcoin Trust and Coinbase. Its main contributors were Roku and Trade Desk. The NAV is up about 5.6% year to date, and the ETF price is 5.3% higher.

ARK Genomic Revolution ETF (NYSEARCA: ARKG) fell short of the broad markets and major indexes during the quarter. Its top contributors were Intellia Therapeutics and CareDx. The top detractors were Teladoc and Iovance Bio. The NAV is down about 0.8% year to date, which is reflected in the price of the ETF.

ARK Fintech Innovation ETF (NYSEARCA: ARKF) underperformed the markets this quarter. Its top contributors were Shopify and Sea. The main detractors were Silvergate Capital and Coinbase. The NAV is up about 9% year to date, while the ETF price is up roughly the same amount.

ARK Space Exploration & Innovation ETF (NYSEARCA: ARKX) underperformed the major indexes as well for the quarter. The top detractors were Komatsu and Virgin Galactic, while the top contributors were Nvidia and Raven Industries. This ETF has not been around as long as the others, so its NAV is up about 2.8% in the past three months, whereas the market price of the ETF is up about 2.1% in the same time.

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