Cathie Wood keeps ‘eye on the prize’ after rotation pummels ETFs

Trader Talk

The violent stock rotation that sent the main ETF from Ark Investment Management to its worst losses in a year is a healthy development for a bull market that will spur the fund to “concentrate toward our highest-conviction names,” founder Cathie Wood said.

Wood’s ETFs gained in early trading on Tuesday, signaling a reprieve from a selloff that wiped 30% from her flagship investing strategy since a Feb. 12 high. The Ark Innovation ETF (ARKK) has logged three weeks of declines, the longest stretch of losses since the COVID 19-spurred meltdown last year, according to data compiled by Bloomberg.

Cathie Wood’s prolonged run of losses represents the biggest test yet for the firm she founded in 2014.

Cathie Wood’s prolonged run of losses represents the biggest test yet for the firm she founded in 2014.

Bloomberg News

ARKK gained 3.9% in the pre-market as of 5:34 a.m. in New York, with other Ark ETFs also in the green.

Speaking in an interview with Bloomberg TV Monday night, Wood said the rotation out of high-growth companies and into value stocks is “happening very quickly” but is a sign of the bull market broadening. Her strategy in such an environment is to treat her more liquid holdings such as Facebook Inc. and Apple Inc. as “cash-like instruments” and concentrate her funds in higher-conviction stocks.

“We keep our eye on the prize,” she said. “We have a five-year time horizon.”

Some of the biggest Ark holdings were also up on Tuesday before the bell. Tesla, Square and Roku — whose miserable runs lately have helped drag down Wood’s ETFs — were all trading higher in the pre-market after slumping on Monday.

Those stocks have been some of the hottest on Wall Street, surging amid a shift to online working and the election of President Biden raising expectations of a policy boost for electric vehicles. Now, the prospect of rising inflation amid an economic recovery is driving up bond yields, making the highest priced equities less attractive.

Wood’s prolonged run of losses represents the biggest test yet for the firm she founded in 2014. Investors poured billions of dollars into her ETFs in recent months inspired by Ark’s stellar returns in 2020.

Short interest in ARKK, as measured by the percentage of available shares that are on loan, has climbed to a record of more than 5.2%, according to data from IHS Markit Ltd. Bearish bets had eased slightly on Thursday.

Still, ARKK has yet to see a large-scale investor exodus despite the recent trouble, possibly due to dip buyers snapping up cheaper shares. Data show that Wood’s main fund recorded a small inflow on both Thursday and Friday, even as it retreated and other funds like the Ark Next Generation Internet ETF (ARKW) and the Ark Genomic Revolution ETF (ARKG) posted outflows.

Meanwhile, the flagship fund is still up more than 100% in the past year.

“For high-flying niche ETFs that hit a rough patch, money historically has left more slowly than it came in,” Eric Balchunas, ETF analyst for Bloomberg Intelligence, wrote in a recent note. “We expect ARKK’s flows to be similarly mixed for some time.”

Additional reporting by Yakob Peterseil, Emily Chang, Joanna Ossinger and Jeremy Herron

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