Will ARKK Recover Its Losses and Regain Investor Trust?

ARKK has been on a downward spiral, with its value plummeting by over 70% since its peak in February 2021. This significant decline has left many investors wondering if the fund will ever recover its losses.

The fund's poor performance can be attributed to the sell-off of its holdings in companies like Tesla and Square, which were once among its top holdings. The fund's exposure to these companies was a major contributor to its losses.

Investors have been losing trust in the fund, with many pulling their money out in search of safer alternatives. The fund's assets under management have declined significantly, from over $15 billion to around $4 billion.

The fund's management has been working to revamp its strategy and reduce its exposure to volatile stocks. However, this change in direction has yet to yield significant results, and investors remain skeptical.

Cathie Wood is the founder and CEO of ARK Invest, and she's been making some interesting predictions lately. She believes that instead of inflation, deflation may actually happen due to advancements in technology leading to higher productivity and lower prices.

Wood pointed to falling commodity prices like oil, lumber, and copper as evidence of deflation in the pipeline. She thinks the Fed will eventually let something crack, like employment, before relenting on inflation.

Coinbase stock is Cathie Wood's top holding, and it's been a big loser this year, retreating 28.3% in January after skyrocketing 391% last year. The SEC's approval of spot bitcoin ETFs sparked sell-the-news selling in bitcoin, causing Coinbase stock to tumble.

Wood's thesis suggests that prices will "unravel to something well below" the 2% inflation target, but it's unclear how long it will take for this to happen.

Investors are being tested with their loyalty to ARKK, as outflows continue and prospects dim.

The chart shows that investor loyalty is being tested now more than ever, making it difficult to determine how many investors are left holding the bag.

Capitulation is possible, but it's uncertain whether it's right around the corner or if there's still more outflows to come.

The ETF is not performing well in the short-term, which will likely dampen any momentum it had.

We're seeing a divergence in the RSI, indicating that momentum is increasing while price is holding steady, suggesting that more buyers are entering the market.

Volatility is expected in the range of $30-$33 based on historical trading patterns, and it's something to be watched closely.

The ARKK ETF destroyed $7.1 billion in wealth over the past decade, a staggering sum that highlights the fund's struggles despite a generally bullish market.

Critics argue that Wood's pandemic-era success was due to the favorable macro-environment, not her stock-picking genius. This is a crucial point to consider when evaluating the fund's potential for recovery.

The surge in inflation following Russia's invasion of Ukraine in 2022 led to tighter monetary policy, driving investors away from speculative stocks like those held by ARK Invest. This change in market conditions was a major contributor to the fund's decline.

Tech stocks are particularly sensitive to interest rate moves, especially when their P/E ratios are high. This sensitivity can lead to significant losses if interest rates rise unexpectedly.

A favorable macro-environment supported Cathie Wood's pandemic-era success, but it's not a guarantee of future success.

Critics argue that her success was due to the favorable macro-environment, not her stock-picking genius. Near zero interest rates and government stimulus drove investors to seek growth in speculative tech stocks.

A flood of liquidity from government stimulus made investors willing to overlook the lack of earnings and invest heavily in high-risk, high-reward bets. This led to a massive decline in the value of ARK Invest's funds when the macro-environment changed.

The ARKK ETF destroyed $7.1 billion in wealth over the past decade, while its healthcare-focused ARK Genomic ETF destroyed $4.2 billion in wealth. This happened during a generally bullish market, making it even more striking.

Investors are sensitive to interest rate moves, especially when P/E ratios are high. Tech stocks are particularly sensitive to interest rate changes.

ARK Invest's funds lost value despite being in a generally favorable market environment. This shows that there's no guarantee of success, even during a bullish market.

Rate cuts have failed to help ARK's recovery, with analysts deeming the pace and scale of these cuts insufficient.

Despite recent rate cuts, interest rates remain elevated, prompting investors to favor companies with positive cash flows and proven commercial success over speculative investments.

Inflation may be under control, but central banks have signaled that a return to near-zero interest rates is unlikely in the near future.

Cathie Wood's funds have underperformed, leading her to clarify that "we have a volatile fund" and advise investors to keep her funds as a "satellite strategy" rather than a major portfolio component.

Investors have been left with heavy losses after going "all in" on her funds, with ARKK's assets under management falling this year from $8.4 billion to $6.45 billion.

At its peak in 2021, ARKK's assets under management soared to $28.2 billion, highlighting the sharp reversal in fortunes the fund has experienced over the past three years.

China's stock markets are seeing one of the strongest rallies globally after three years of underperformance.

This rally is a significant turnaround, as China's stock markets have been lagging behind other major markets. The iShares MSCI China ETF, a widely followed benchmark, has been a key indicator of this recovery.

The ETF has seen a substantial increase in value, with a 20% rise in just a few months. This is a notable shift from the previous three years, where the ETF struggled to gain traction.

Investors are taking notice of this recovery, and it's likely that more funds will flow into China's stock markets as a result.

Investors in ARKK have actually fared worse than the reported total returns over various time periods. The dollar-weighted returns lagged total returns by about 1 percentage point over the past 12 months.

The picture looks considerably worse over longer periods. After adjusting for the timing of cash inflows and outflows, we estimate that shareholders suffered a 28% dollar-weighted average loss for the trailing three-year period.

This loss is more than twice the fund's reported loss over that span.

As we wrap up the year, it's clear that market conditions have been tough on investors. The current state of inflation has amplified losses for companies that aren't profitable or cash flow positive.

Inflation has also made it even more expensive for companies to fund their operations and growth, as they're burning cash to stay afloat. This is especially true for companies that rely on loans to fund their cash flow, as higher interest rates are making it more costly to borrow money.

One notable example is the ARKK fund, which has seen significant challenges this year. The fund's holdings are particularly vulnerable to the current market conditions, making it difficult for them to turn things around.

Here are some key points that summarize the current state of the market:

Investor returns for ARKK lagged total returns by about 1 percentage point over the past 12 months.

The performance gaps haven't significantly improved over time, making it essential to understand the difference between total returns and investor returns.

Investors' actual results lagged reported total returns over all four trailing periods, with dollar-weighted returns trailing by a significant margin.

The fund's reported 9.59% annualized return over its full life span has outpaced that of the average mid-cap growth fund by about 1.6 percentage points per year.

However, after adjusting for the timing of cash inflows and outflows, we estimate that investor returns were far worse, with dollar-weighted returns being sharply negative.

This discrepancy highlights the importance of considering investor returns when evaluating fund performance, rather than just relying on total returns.

The fund's breakneck volatility and drawdown risk make any risk-adjusted measure of its dollar-weighted returns even more worrisome.

After adjusting for the timing of cash inflows and outflows, we estimate that shareholders suffered a 28% dollar-weighted average loss for the trailing three-year period, which is more than twice the fund's reported loss over that span.

ARKK's struggles are well-documented, with the fund underperforming markets for the past three years. The reason for this underperformance is largely due to a concentrated portfolio full of high-growth bets trading at steep valuations and focusing on emerging technologies.

In 2021, the fund shed about 23.9% of its value for the full year, with previously high-flying holdings like Teladoc Health, Roku, and Zoom Video Communications crashing back to earth. The fund's sharp losses in 2022 were also exacerbated by its exposure to high-growth stocks.

Despite its struggles, ARKK has seen some positive developments. The fund has actually seen net inflows totaling about $1.3 billion for the full year in 2022, and outflows have totaled about $12 million for the first five months of 2023. This suggests that investors are still interested in the fund, even after its underperformance.

ARKK's biggest challenge is convincing investors that its strategy of making outsized bets on disruptive companies will pay off. The fund's bets on healthcare, including Crisper gene editing, may be a key area of focus for the fund in the coming years.