ARKX: Revisiting Cathie Wood’s Intergalactic ETF

Introduction

Ok, I got it wrong. A neutral stance on an interplanetary ETF aimed at wowing the retail mob with innovation. During last year’s Fed liquidity induced post-Covid bounce, everything seemingly went vertical.

Cathie’s track record of outrageous calls on risk capital mooning on the back of little earnings, much-a-do about nothing sales, and big euphoria suggested nothing different.

Cathie has been taunted, even made fun of in the financial press. Her wacky, innovative packaged investment products were heavily prized by the millennial crowd geared towards revolutionizing big finance. Besides, fixed income is for losers, right?

She had hit it out of the park before, so why question her batting average? Then macro conditions changed.

Source: ARK Funds

Cathie Wood remains one of the quirkiest, most innovative, controversial names in money management to date.

We have had a full-blown conflict the Donbas, eye-watering energy inflation, a US dollar rocketing to the stratosphere, and a rate hiking cycle not seen for over 30 years. Europe is reeling in inflationary pain; the US is falling into recession & Asia still has not fully gotten over Covid lockdowns.

All these things represent kryptonite for the typical stock found in any one of Cathie’s ETF wrappers, including ARK Space Exploration & Innovation (BATS:ARKX).

Big vision, puny profits, pristine projections, and mammoth multiples characterize a typical ARK ETF holding. Add to that cocktail a dash of illiquidity and you create a capital market conundrum during a monetary squeeze. As interest rates rise, future – often fanciful – projected earnings are discounted at an increasingly greater rate, sapping away at the present value of those theoretical cash flows.

When given the choice between hard cash or theoretical record sales, investors tend to opt for the former, taking the air out of speculative plays, including large components of ARK’s ETFs.

Source: Ark Funds

Investment thesis: ARKX Space Exploration & Innovation ETF

Product Synopsis

My previous article provided a decent introduction to ARKX Space Exploration & Innovation ETF. The crux of the ideology behind ARKX, like most of the fund’s offerings, is to provide investors with access to ground-breaking innovation.

Select tickers held by the fund are unsurprisingly focused on innovation across “space” with the odd standout. Key to the fund’s holdings are companies linked to orbital aerospace such as satellites, suborbital aerospace – think Virgin Galactic (SPCE), – technology enablers, and aerospace beneficiary enterprises.

That gives the fund manager reasonable flexibility to stock pick tickers which have found investor favor. The problem today, however, is that there is not any. The fund remains actively managed, under Cathie’s direction.

Total returns year-to-date (ARKX) v (UFO) v (FITE)

Returns year-to-date have done little to wow investors with (ARKX) giving up -28.92% over the period. Its closest competitor, Procure Space ETF (UFO) has not fared much better, posting -28.23%. SPDR Kensho Future Security ETF (FITE) has achieved better results, solely losing -15.44% and outperforming the wider market.

Scatter Diagram Historical % Price Change YTD v Holdings Weight (ARKX)

Most of the fund’s holdings have found themselves deep underwater, including premier holding Trimble Inc (TRMB) which makes up circa 10%, at roughly $27M. Its lacklustre performance has sapped away at the fund’s overall performance, taking about 370 basis points off fund returns.

The losers however have been evenly spread with UiPath Inc (PATH), Kratos Defense & Security Solutions (KTOS), Unity Software Inc (U) and ARK ETF 3D Printing ETF (PRNT) all delivering losses.

Changes in Product Structure

Breakdown of fund holdings, weightings & contribution to ETF returns

The ETF puts the holder in a place you don’t want to be at times of heightened volatility, with a focus on industrials, information technology and communications services. These asset classes often belong to the high book value, big revenue, and growth projections crowd often the first to tank in market downturns.

Despite technology only representing ~25% of the fund’s weight, this sector has been responsible for the lion’s share of capital destruction (-17.4%) Industrials, which represent half the funds weighting, have not followed too far behind (-14.09%)

Trading volume in the ETF has remarkably dried up since ~July 2022

Liquidity and perchance interest in trading the security has dried up too, with a notable drop in traded volume from roughly mid this year. Additionally, the fund’s assets under management ($272M) have seen a barrage of redemptions.

To put this into perspective, the fund posted almost $600M in AUM during my last review. Nowadays, the fund commands $263M, laying testament to the dwindling interest in innovative investment packages.

Comparative analysis ARKX

A quick glimpse at the comparative analysis since last post shows the level of destruction this fund has witnessed over the past 12 months. Traded volumes are down, spreads have increased, and redemptions have skyrocketed as investor risk appetite declines.

Expense ratios have remained the same as has the number of stocks the fund contains. None of that has done anything to quell investor angst as risk capital progressively implodes.

Key Takeaways

(ARKX) – Ark’s space exploration and innovation ETF hit the market at a perfect time. SPACs, meme-stocks and stonks were in vogue and the retail crowd, perhaps bored in confinement, made day-trading a hobby. It was an era of everything going up, induced by loose monetary policy as the world tried to overcome a global economic shutdown. But times have changed.

Inflationary pressures are at the fore, and actions undertaken by Central Banks the world over are making capital markets treacherous places to navigate. That spells trouble for ARKX, which embraces innovative, high-multiple tickers with lots in terms of promises and perspective, but very little in terms of concrete cash flows.

Given that current macro environment, it remains very difficult to give Cathie’s product a shining endorsement.