Cathie Wood’s flagship Ark Innovation ETF (ARKK) has been one of the worst performing ETFs managed by her asset management company Ark Investment Management LLC. The ETF has slumped 24.1% in price year-to-date and 20.3% over the past month to close yesterday’s trading session at $94.50.

This comes in after ARKK surged more than 152.5% in 2020, making it the fastest-growing ETF in history. Wood emerged as one of the most profitable investors last year, winning big on her major bets on Bitcoin and electric vehicle (EV) maker Tesla, Inc. (TSLA).

The actively managed ETF had  $18.38 billion in assets under management as of November 30, 2021. Its major holdings include TSLA, Roku Inc. (ROKU), Teladoc Health Inc. (TDOC), and Coinbase Global (COIN).

Here is what could shape ARKK’s performance in the near term:

Reflation Trade

Last year, Wood’s success came from her bets on major stay-at-home stocks, including Zoom Video Technologies (ZM), TDOC, and ROKU. These stocks surged substantially from the previous year, given their crucial role in sustaining remote work and lifestyles.

However, with the gradual reopening of the economies worldwide, stay-at-home stocks have taken a hit. Investors have been focusing on outdoor stocks, causing popular tech stocks such as ZM to decline 45.1% year-to-date. TDOC and ROKU slumped 53.7% and 33.2% in price, respectively.

Tech Sell-Off

The technology industry has been through the wringer this year. The rapid economic recovery and removal of travel and social distancing restrictions have precipitated a major sell-off over the past month, causing ARKK, which bets primarily on disruptive technology stocks, to decline. The tech-heavy benchmark Nasdaq composite has fallen 3.5% over the past month and 1.7% over the past five days, reflecting bearish market sentiment. Consequently, ARRK has slumped 20.3% over the past month and 8.5% over the past five days.

Furthermore, despite the recent pullback, the tech industry remains immensely overvalued, reflecting signs of an asset bubble. Many analysts are comparing the situation with the dot-com bubble in the 2000s. Because most analysts predict a severe market correction early next year, the overvalued tech industry could  witness a trend reversal.

Bank of America analyst Michael Hartnett expects the tech sell-off to worsen in the near term as the Fed raises benchmark interest rates.

High Inflation and Hawkish Monetary Policy

Rising interest rates have historically caused high-growth tech stocks to retreat  as investors shift toward relatively stable value stocks and debt instruments. With inflation nearing a 40-year high and unemployment at a 52-year low, economists and analysts expect the Federal Reserve to increase the benchmark interest rates early next year. The Fed has already tapered its bond purchases by $15 billion last month.

Given this backdrop, the overvalued tech industry will likely witness a sharp pullback, causing ARKK to decline  further.

Crypto Crackdown

The cryptocurrency industry crashed earlier this month due to increasing regulatory restrictions globally. Following China, India is currently working toward banning crypto transactions in the country. And Binance, the world’s largest cryptocurrency exchange, is currently shutting down its operations in Singapore. The United States is currently working toward introducing several regulatory frameworks to rein in cryptocurrencies such as Bitcoin and Ethereum and promote U.S. Dollar-pegged stable coins.

ARKK has a substantial stake in cryptocurrencies and publicly traded crypto-mining and exchange companies. Thus, the fund is expected to be adversely impacted by the regulatory headwinds.

POWR Ratings Reflect Bleak Prospects

ARKK has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

ARKK has an F for Trade Grade, and a D for Buy & Hold grade. The ETF is currently trading below its 50-day and 200-day moving averages of $112.92 and $117.47, respectively, indicating a downtrend justifying its Trade grade. In addition, ARKK is currently trading 40.8% below its 52-week high of $159.70, justifying the Buy & Hold grade.

ARKK is ranked #78 out of 119 ETFs in the Technology Equities ETFs group.

In addition to the grades I have highlighted, click here to view the ARKK rating for Peer Grade.

Bottom Line

The tech industry is expected to suffer a massive pullback in the near term, as evidenced by current stock market trends and macroeconomic parameters. While Cathie Wood might be right about the future of disruptive technology trends, tech stocks are expected to remain subdued in the coming months, as evidenced by market indicators. Furthermore, ARKK has an expense ratio of 0.75%, which is 80 basis points higher than the FactSet segment average of 0.67%. Thus, we think the ETF is best avoided now.

How Does Ark Innovation ETF (ARKK) Stack Up Against its Peers?

While ARKK has a D rating in our proprietary rating system, one might want to consider looking at its industry peers, Vanguard Information Tech ETF (VGT), Technology Select Sector SPDR ETF (XLK), and iShares U.S. Technology ETF (IYW), which have an A (Strong Buy) rating.

ARKK shares fell $0.78 (-0.83%) in premarket trading Tuesday. Year-to-date, ARKK has declined -24.09%, versus a 26.01% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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