Can Cathie Wood’s Ark Invest ETFs regain momentum?

Catherine Wood (pictured) is known for her star stock-picking abilities, and her firm’s disruptive technology-focused ETFs delivered stellar returns in 2020. But since the start of 2021, Ark Invest’s funds have underperformed.

Take the Next Generation Internet ETF [ARKW]. Despite climbing 39.5% in the past year, it has declined 0.6% in the year-to-date (through 22 September). In comparison, the Dow Jones Internet Composite Index has returned 23.6% and 10.9% in the same periods.

Ark’s Next Generation Internet ETF had a fruitful 2020, mainly due to its exposure to electric vehicle maker Tesla [TSLA], its biggest holding with a 10.02% weighting. It also holds other coronavirus pandemic beneficiaries, such as Roku [ROKU], Square [SQ], Teladoc [TDOC] and Twilio [TWLO].

Many of these high-flying, big-name technology stocks have dipped from their respective all-time highs set over the last 12 to 18 months as inflation fears loom large. And as both the S&P 500 and Nasdaq continue to reach new levels – defying those same fears – there are warnings that there’s still a huge amount of froth in the market, making a correction much more likely.

 

Ark Invest drops out of top 10 ETF issuers

The shine that has been taken off many of the assets held in Wood’s ETFs has seen Ark Invest drop out of the top 10 largest issuers by assets to 11th place, according to Bloomberg Intelligence data.

Yet, Wood herself is hopeful that the disappointing August US jobs report and a weakening consumer price index are signs that economic activity will continue to slow into 2022 and that this will give growth stocks a boost.

Speaking at the Skybridge Capital SALT 2021 virtual conference, held in New York earlier this month, Wood stated: “We think we are moving into the other side of the cycle ... We do believe that the market will start rotating back toward growth and innovation.”

“We think we are moving into the other side of the cycle ... We do believe that the market will start rotating back toward growth and innovation” - ArkInvest CEO Cathie Wood

 

A Bitcoin bull

Wood also used her appearance at the conference to reiterate her $500,000 five-year price target for Bitcoin.

“If we’re right, companies continue to diversify their cash into something like crypto, and institutional investors start allocating 5% of their funds towards crypto … We believe that [Bitcoin’s] price will be ten-fold of where it is today,” Wood explained.

The Next Generation Internet ETF holdings Tesla and Square have both purchased significant amounts of the cryptocurrency this year to bolster their balance sheets.

Wood also threw her support behind Ethereum and decentralised finance (DeFi) applications.  

“I’m fascinated with what's going on in DeFi, which is collapsing the cost of the infrastructure for financial services in a way that I know that the traditional financial industry does not appreciate right now,” Wood said. “Our confidence in Ethereum has gone up dramatically as we've seen the beginning of this transition from proof-of-work to proof-of-stake.”

“Our confidence in Ethereum has gone up dramatically as we've seen the beginning of this transition from proof-of-work to proof-of-stake” - Cathie Wood

 

While ARKW holds Grayscale Bitcoin Trust [GBTC], with a 4.13% allocation, Wood wants to increase the exposure.

In a filing with the SEC seen by Bloomberg, Wood’s firm has tweaked the Next Generation Internet ETF’s prospectus to include reference to cryptocurrencies via “exchange traded funds domiciled in Canada”. A spokesperson didn’t respond to the publication’s request for comment on the documentation changes.

 

No SEC approval yet

In an ideal world, Wood would like her own US-domiciled cryptocurrency ETF, but the SEC hasn’t made it easy for her or other like-minded ETF managers. The SEC has rejected several bitcoin-based ETF proposals so far this year.

There are, perhaps, signs of change. As reported by Bitcoin Magazine, SEC chairman Gary Gensler hinted in a speech he gave in early August that ETF proposals based on Bitcoin futures are likely to have a higher chance of being approved. Several firms have filed for Bitcoin-future ETFs in the weeks since the speech.

However, Todd Rosenbluth, head of ETF and mutual fund research at CFRA, told CNBC a couple of weeks after Gensler’s speech that he doesn’t expect the SEC to approve a proposal any time soon.

“I expect a futures-based ETF approval is more likely to occur in 2022 than in 2021,” said Rosenbluth.

He added the SEC would likely be concerned about volatility, fraud and the impact that the introduction of such ETFs would have on the overall market.

“I expect a futures-based ETF approval is more likely to occur in 2022 than in 2021” - Todd Rosenbluth, head of ETF at CFRA

 

ARKW European alternatives

While we wait to see what moves the SEC makes, for those investors in the UK and Europe finding it hard to buy into the Next Generation Internet ETF, here are some alternatives.

The HAN-GINS Tech Megatrend Equal Weight Ucits ETF [ITEK.L] offers exposure to a mix of technology companies and chipmakers as well as cryptocurrency in the form of Marathon Digital [MARA]. The ETF has returned 41.62% year-to-date and 0.95% in the last three months.

The First Trust Global Funds PLC Dow Jones Internet UCITS ETF [FDN.L] offers exposure to internet and technology giants, including PayPal [PYPL], Zoom [ZM] and Snap [SNAP]. As of the end of July, the fund has returned 31.35% in the past year, and 5.61% since the end of March.