Should we buy the Cathie Wood Innovation ETF?

The main fund of Ark Investment, the ARKK Innovation ETF, which specializes in “innovation stocks” such as Tesla, Coinbase y teladoc, is down 76% from its peak, with higher interest rates and slower economic growth wreaking havoc on its assets. And now, investors are turning against the fund's founder, Cathie Wood. So, let's take a look at whether we should listen to the haters or buy the fund while it is in a deep correction.

Why should we buy ARKK?✅

On the one hand, the world is experiencing one of the largest technological transformations in history. Companies that disrupt their industries are likely to be handsomely rewarded. And as the Ark team argued in a recent article, innovation stocks are not particularly represented in traditional indices such as the S & P 500. That means future winners are being underestimated in favor of current ones. So keeping a place for innovation in our portfolios could help us achieve attractive long-term returns.

On the other hand, investors now appear to be pricing in thestagflation«, that is, slow economic growth and high inflation, in the markets, and has been a key reason for the recent sell-off in technology stocks. So, any positive surprise to the contrary could lead to a significant reversal. Let's say that the Federal Reserve (Fed) manages to stop the rise in prices without causing a recession: Investor sentiment could turn bullish again, and growth stocks could suddenly catch up. And even if the economy slowed, the Federal Reserve would quickly cut interest rates again. That could be a positive for growth stocks, raising the present value of their future cash flows. Let's also consider that investors looking for double-digit growth opportunities in a slowing economy could also join in, raising their valuations again.

Why shouldn't we buy ARKK?❌

Although the market has fallen recently, it is difficult to say that the valuations of the disruptive and high-growth companies that Ark invests in are very cheap. If anything, the correction has only returned their ratings to more normal levels. But here's the thing: Company valuations often don't stop at their fair values. In fact, they usually surpass the mark and go much lower. That's especially true right now, when an environment of flagging economic growth and high inflation is proving particularly challenging for growth stocks, just when investor confidence could deteriorate further. If investors start selling more aggressively, growth stocks wouldn't be saved just because they've already fallen. Neither does ARKK, which could fall even further than… well, take a look at the graph and judge for yourself…

Also remember that any reduction can have a greater impact on our portfolios than we think. Let's say a stock has corrected 80%, from $100 to $20. So you buy, hoping that your downside is limited to 20%. But that's not the case: if that becomes a 90% correction, the reduction (from $20 to $10) is another 50%. That means there is room for significant percentage losses. Another concern is that many innovation stocks tend to be owned by large funds like Ark Invest, meaning they are much less liquid than other stocks. If liquidations force those funds to trim their positions, that could send prices sharply lower. And if market makers and algorithms anticipate that possibility, it could fall even faster. Put another way, prices could go down a lot before they go up, meaning buying on the dip is always a risky proposition.

So, is it a good option to buy ARKK?❓

I think having at least some long-term exposure to the most disruptive businesses makes sense, especially when you can buy at these levels. That said, its high-risk, high-return profile means we'll need to be careful with its implementation: only risk an amount you'd be willing to lose completely and buy at different intervals to benefit from dollar-cost averaging. We could invest half now and half in 3 months, for example, with the option to buy sooner if prices fall further. As for what to buy, we have two options. The first, obviously, is to buy the ARK Innovation ETFs (ARKK), which invests in the company's best options. Investing in ARK is a bit like investing in a venture capital fund. That means judging the fund's results over a much longer horizon than we might be used to. Of course, we could try to do better, but if we don't have the time or experience, investing in ARKK is arguably a good way to back the disruptors.

You may also be hesitant to buy because of all the negative comments surrounding the fund. But you have to respect Cathie Wood: she has democratized access to information by openly sharing her research, and even her actual transactions, with investors. Additionally, she makes difficult but smart decisions, such as reducing the number of holdings in her funds and increasing concentration on principals when times are tough. That forces analysts to focus on Ark's most committed beliefs, a far cry from managers who simply embrace their benchmarks and follow the herd. And of course, Wood focuses a lot on the stories and narratives behind the companies. But that's the nature of the companies she invests in: They're making big, bold bets that will only pay off in a few years, making current financial numbers less relevant than the prospect of where they will be in the future. .

What if I'm not convinced about buying the ETF?

If you are still not convinced, the second option is to choose between the stocks within their funds. Crypto Bulls Might Want to Snap Up Crypto Exchange Shares Coinbase, which has slid to all-time lows in the wake of falling crypto markets and disappointing earnings generated. Ark also seems bullish on healthcare, with three companies in the top 10: ExactScience Corp (cancer detection), teladoc (virtual healthcare services) and Crispr Therapeutics (gene editing). And the most traditional technology: Zoom (video meetings), Roku (TV broadcast), Block (Payments), Twilio (cloud communications) and UIPath (robotics) complete the top 10. Oh, and without forgetting Tesla: for a long time the favorite and the largest position in the fund.