The ARK Innovation ETF: Tesla Is Cathie Wood’s Latest Problem

The ARK Innovation ETF (NYSEARCA:ARKK), which had a disastrous year in 2022, is off to a bad start in 2023 as one of the fund’s most heavily weighted investments falls to new lows.

Tesla Inc. (TSLA) is the fund’s most recent issue, as the once-popular stock missed 4Q-22 delivery expectations and fell to a new 52-week low this week.

Cathie Wood’s flagship fund, on the other hand, has been busy buying into Tesla’s slump, potentially repeating past mistakes by doubling down on beaten down stocks when investors are fleeing.

Tesla is now a significant drag on the fund’s performance, and the fund’s over-weighting of a few high-growth names in the technology industry may result in additional losses for investors if a recession occurs in 2023.

The Streak Of Fund Losses Continues In 2023

If you invested $10K in the ARK Innovation exchange-traded fund at the beginning of 2022, you would have about $3.1K today, representing a 69% loss.

The ARK Innovation ETF has fallen out of favor with growth investors due to ill-timed investments made by the fund during the COVID-19 pandemic, which saw valuations of innovative startups and technology companies skyrocket before plummeting in 2022. Whether it’s cryptocurrency, electric vehicles, software companies, or fintechs, the market delivered a brutal shakeout in 2022 that the ARK Innovation ETF has yet to recover from.

As a result, the investment return has been -69% since the beginning of 2022, representing a frightening degree of under-performance when compared to more broadly diversified stock indices.

Tesla Now A Drag On Fund Performance

Tesla was ranked as a top two portfolio position for the ARK Innovation ETF back in December, and the exchange-traded fund owned 3.1 million shares of Tesla valued at $555.6 million, representing an 8.03% portfolio weighting.

Keeping with the fund’s previous trading strategy, the ARK Innovation ETF aggressively doubled down on companies that it had previously purchased at much higher prices.

Fund management decided to buy a boatload of Tesla shares against the flow, adding 461K shares over the last month, representing a 15% increase over the December 7, 2022 holding report.

The ARK Innovation ETF now owns 3.55 million shares of Tesla after a series of trades, the most recent of which occurred on December 3, 2022, when the fund purchased 144.78K shares of Tesla.

The portfolio weighting of Tesla in the ARKK portfolio has been reduced to 6.55% due to the frightening decline in the market valuation of Tesla’s stock in 2022 (the stock lost approximately 70% of its value last year).

According to Cathies Ark, the Ark Innovation ETF is now about break-even on its TSLA position, having lost almost all of its mark-to-market gains. The average cost as of January 3, 2023 was $108.38, compared to a Tesla stock price of $111.70 at the time of writing.

My personal take on ARKK’s recent Tesla purchases is that the fund has not learned from its previous mistakes.

In 2022, the ARK Innovation ETF has consistently doubled down, seemingly blindly, on stocks that have fallen out of favor, including crypto-currency platform Coinbase, video-conferencing platform Zoom Video Communications, eCommerce company Shopify, streaming company Roku, and fintech startup Block (formerly known as Square).

The majority of ARKK’s portfolio holdings are still loss-making businesses with inflated sales multiples that I believe have little chance of recovering in 2023.

Why ARKK Could See A Higher Valuation

I believe that the only significant catalyst for the ARK Innovation ETF is the avoidance of a recession.

If a recession begins in 2023, as I believe is now widely expected, the ARK Innovation ETF is particularly vulnerable to further valuation cuts for its top fund holdings, which primarily consist of companies with unprofitable (Shopify, Block) or shaky business models (Roku, Teladoc).

My Conclusion

Unfortunately, the ARK Innovation ETF is still pursuing its failed 2022 strategy, which appears to be simply doubling down on any portfolio holding that has seen a significant valuation haircut.

This strategy did not work in 2022 and is unlikely to work in 2023, especially if a recession occurs and investors avoid high-priced growth stocks. We are only four days into the new year, and Tesla is already a significant drag on the fund’s performance.

I am extremely concerned about the ARK Innovation ETF’s aggressive acquisition strategy and lack of prudent risk management.

If fund management fails to learn from past mistakes, especially with a recession on the horizon, the fund may continue to expose investors to net asset value losses.