Cathie Wood’s flagship ARK Innovation ETF (NYSEARCA:ARKK) became a popular proxy for the tech and innovation boom that accompanied the pandemic, with COVID shutdowns spotlighting the promise of the sector. Meanwhile, aggressive government stimulus provided fuel for a rally that lasted most of 2020 and the first few months of 2021.
However, 2022 saw a massive retrenchment, as the lifting of pandemic demand and the aggressive rise in interest rates put the pinch on more speculative names. As a result, ARKK collapsed by about 67% in 2022 –- making it one of the year’s biggest stories.
Predicting ARKK’s 2022 Collapse
Here are Seeking Alpha editors’ picks for some of the best contributor work predicting ARKK’s 2022 tumble.
Seeking Alpha contributor Chris DeMuth Jr. was among those who clearly saw that 2022 would be marked by a further bursting of ARKK’s innovation bubble, after the ETF already started to unwind during 2021.
Back in December of 2021, DeMuth argued that ARKK was a clear-cut sell, stating: “Cinches are rare in the capital markets. … Over the next five years, [ARKK] won’t compound at 40%…or 30%…or at all. If you own ARKK, sell it; if you don’t own ARKK, short it. Then ignore it and check back in five years.”
That prediction proved spectacularly correct. ARKK fell around 67% in 2022. As of December 30, the ETF closed trading just below above $31 — compared to an all-time high of $159.70 reached in February of 2021. The fund finished 2021 at $94.59.
Fellow SA contributor Robert Castellano also predicted a tough 2022 for ARKK. When he released his bearish note in January, Wood’s ETF had already been cut in half since its 2021 peak and was, at that point, approaching an 18-month low.
However, Castellano saw further downside — and since his call, ARKK has retreated another 59%.
“Now is not a time to buy ARKK, as there are absolutely no signs the bottom of these ARKK stocks has been reached,” he stated in a note dated Jan. 20. “Don’t rely on Cathie Wood.”
Around the same time, Pearl Gray Equity and Research, another SA contributor, likewise predicted that the fissures in ARKK’s support would continue to expand.
“I’m well aware that this is an actively managed fund, but it generally owns high price-multiple stocks,” the contributor noted. “The issue with high multiple stocks is that they tend to decline rapidly in rising rate environments because the value of their future cash flows gets dissolved exponentially versus value firms.”
Inside ARKK’s Decline
A look at some of ARKK’s top holdings underlines the factors that weighed on the fund. The ETF’s top holding is Zoom Video Communications (ZM), a stock that surged during the pandemic amid a flood of work-at-home demand but has dropped precipitously after the online video conferencing service was unable to sustain COVID-inflated growth rates.
ZM, which has a 9.1% weighting within ARKK, peaked above $580 in October of 2020. As of the close on December 29, 2022, the stock had plunged to $68, recently bouncing off its 52-week low of $63.55. ZM has fallen 63% in 2022.
A tour of other heavy investments from Wood’s ARK Innovation ETF (ARKK) further drives home the dynamics that weighed on the tech sector in 2022.
Tesla (TSLA), which is ARKK’s third-largest holding with weighting of 6.4%, dropped almost 70% in 2022 amid concerns about rising competition in the EV space, ongoing supply chain issues/production snags and the distraction CEO Elon Musk has faced following his acquisition of Twitter.
Looking at some of the other lowlights in ARKK’s top-ten holdings, Shopify (SHOP) has fallen more than 74% as pandemic demand has evaporated from the ecommerce space. Meanwhile, Teladoc Health (TDOC), another one-time COVID play, has fallen nearly 75% in 2022. At the same time, Block (SQ) has slumped more than 60% amid a reconsideration of the perceived fintech boom.
Despite its sharp drop in 2022, ARKK was still able to attract significant investor capital. The fund added inflows of $1.27B over the course of the year.
2022 Walkthrough of ARKK’s Performance
- Never traded higher than +0.5% on the year.
- Dropped as low as -69.1%.
- Closed in negative territory in 9 of the 11 months, and another negative close in December is likely.
- Longest daily winning streak was 5 days.
- Longest daily losing streak was 7 days (twice).
- Largest single day gain was +14.5% on November 10th.
- Largest single day loss was -10.1% on May 11th.
- ARKK attracted $1.5B worth of investor capital by mid-December.
- On its eighth birthday (Oct. 31) its lifetime gains dropped below that of the S&P 500.
- With the 2022 decline, ARKK plunged to a 5-year trading low.
Beyond the performance in ARKK itself, 2022 has put Wood’s reputation as a market guru under the microscope. This has come as the money manager continued to all her holdings, and her overall investing outlook, even in the face of the year’s harsh realities.
2022 Notable Cathie Wood Quotes
- Jan 19: “In our view, the real bubble could be building in such so-called ‘value’ stocks.”
- Feb 8: “We don’t have an inflation problem.”
- Apr 29: Wood stated that Teledoc Health (TDOC) can be a “category killer during the next five to ten years.”
- May 5: “In my view, history will deem the accelerated shift toward passive funds during the last 20 years as a massive misallocation of capital.”
- Jun 28: “We were wrong on one thing and that was inflation being as sustained as it has been.”
- Aug 8: “We believe we’re in a recession.”
- Sept. 8: “Powell is using Volcker’s sledgehammer and, I believe, making a mistake.”
- Oct 10: Wood said that the Federal Reserve could be “making a policy error that will cause deflation” − noting that inflation might have already peaked.
- Nov 23: Amongst the FTX collapse, Bitcoin (BTC-USD) has come out of this “smelling like roses,” as she stands by her view that Bitcoin will hit $1M per coin by 2030.
ARKK is not the only one of Wood’s ETFs to come under pressure. Below is a breakdown of Wood’s other ETFs and their year-to-date price action (as of Dec. 29 close): (ARKW) -68%(ARKQ) -48%(ARKG) -55%(ARKF) -65%and (ARKX) -35%.
Looking to 2023, DeMuth hasn’t revisited the ARKK call since making his Strong Sell recommendation in late 2021. However, a number of other SA contributors have continued to take a bearish attitude in recent weeks, even after the sharp fall seen over the previous 12 months.
In late December, SA contributor CashFlow Hunter characterized Wood’s strategy as “doubling and tripling down on a losing bet.” Earlier in the month, On the Pulse issued a similarly dim assessment, declaring “no end of pain in sight” for the ETF.
Meanwhile, The Value Portfolio has spotlighted the Tuttle Capital Short Innovation ETF (SARK), an ETF created to move in an inverse direction as ARKK, and therefore a fund that would profit from further declines in Wood’s portfolio. “We expect SARK to have another strong year going into 2023, as technology stocks underperform,” The Value Portfolio said in a note issued in late December.
Daniel Loeb, the billionaire leader of hedge fund Third Point, has also become a vocal critic of Wood’s approach. He stated that a recent market memo from the CEO and CIO of ARK Invest should be used as a dissertation to understand the mindset approach of “stonk hodlers.”