The ARK Innovation ETF is back in business, but for how long?

The ARK Innovation ETF is up by more than a third in 2023 as disruptive tech makes a comeback. Top holdings including Tesla and Roku are soaring as the tech sector recovers from 2022’s tough macro conditions. However, Cathie Wood’s exit from Nvidia will have dented ARKK’s potential growth.

• ARK Innovation ETF up 36% this year, following 2022’s 67% tumble.
• Top holding Tesla has soared 98% year to date.
• Mixed outlook from analysts for ARKK.

The ARK Innovation ETF [ARKK] has jumped 36% year to date to 9 June, and climbed 11.1% over the past month, in a turnaround from last year’s dismal fortunes.

CEO of ARK Invest Cathie Wood founded the flagship fund in 2014 to track the performance of companies invested in “disruptive innovation” — technological products or services with the potential to change how the world operates.

According to ARK, this covers areas including: DNA technologies and the ‘genomic revolution’; automation, robotics and energy storage; and artificial intelligence and fintech innovation.

During 2022, growth tech shares such as those in the fund were pummelled by high interest rates and soaring inflation, as the US Federal Reserve tightened monetary policy.

The ARKK fund sank 67%, more than triple the losses of the S&P 500, by the year’s end. In mid-December, according to data from Morningstar, the ETF was the worst-performing of 537 US mid-cap growth funds, and near the bottom for equity funds.

Now, however, disruptive technology appears to be prospering. ARKK’s positive performance is partly driven by top holding Tesla [TSLA]’s sustained growth in 2023. However, in January ARK Invest exited its position in Nvidia [NVDA], missing out on the US chipmaker’s recent rally — the stock has surged $560bn since, surpassing a $1trn market cap. In the short term the move will have dented ARKK’s growth.

Explaining the move, Wood recently said the chip industry’s boom-bust cycle posed inherent risks. Frank Downing, a research director at ARK, claimed Nvidia was overinflated compared to other software stocks.

Tesla stock soaring

ARKK’s biggest holding, electric car maker Tesla, made up 12.52% of the portfolio value as of 9 June. Tesla’s share price has rocketed 98.4% year to date, and 44.5% across the last month, closing at $244.40 on 9 June: a sharp reversal in fortunes from its nearly 70% plunge last year. On Friday, Tesla rose 4% following a new deal allowing General Motors [GM] access to Tesla’s US charging stations.

A programme of price cuts has also supported higher sales. In January, Tesla slashed costs for two electric vehicle (EV) models in the US, China, Europe, by up to 20%, and again in March, though it nudged up prices again in May.

More stock gains lie ahead, ARK Invest announced. In April, it said it expected Tesla stock to hit $2,000 per share by 2027. In a simulated model, it marked the firm’s proposed robotaxi service as a key driver, with 67% of predicted enterprise value and 64% of expected EBITDA, ahead of EVs at 47% of revenues.

The ARKK fund’s second-largest holding is smart TV maker and streaming platform Roku [ROKU], with a 7.99% share. The company’s stock is also faring well, up 70.7% year-to-date, following a similarly tricky 2022, when its stock nosedived 83%.

In April, ROKU announced it had added more active users than anticipated in Q1, some 1.6 million accounts. It forecast revenue of $770m, 1% above expectations from analysts polled by FactSet.

Other names in the ARKK fund include Zoom [ZM], its third-largest holding, and UiPath [PATH], its fourth-largest.

Widening tech remit for ARKK?

Cathie Wood and ARK Invest are among the best-known names in the ETF field — when Wood acts, investors take note. However, ARKK’s fortunes have been mixed. In early 2021, ARKK rode a high, but fell 21.8% by the year’s end. Meanwhile, 2022’s crash means some analysts are cautious on tipping the fund for investment. While ARKK has climbed year-to-date, it’s still down 1.6% over the past 12 months. However, it has gained despite the Nvidia exit, a stock it held since its inception.

Some shifts in Wood’s strategy have been hinted at. In late May, she said software companies — rather than hardware stocks like Nvidia — were on her radar. At ARK Invest’s Big Ideas conference, Wood highlighted other trends that could drive the disruptive technology theme, including grocery-delivering drones and 3D-printed robots. More recently, Wood has turned to crypto, on 7 June snapping up $20m or around 400,000 Coinbase [COIN] shares for ARKK. The stock had tumbled after a Securities and Exchange Commission’s lawsuit against it. Shares in ARKK reacted by falling 1% on the day. All eyes will be on ARKK’s top holding Tesla. Analysts polled by FactSet recently identified Tesla as the most overbought stock, with a 14-day relative strength index of 91.46, suggesting a correction of 17.4%. Of those polled, only 40% of analysts rated Tesla a ‘buy’. At TipRanks, the ARK Innovation ETF is rated as neutral or a ‘hold’. The average 12-month target price is $48.89, which would represent a 15.7% rise from its last close.