Renowned institutional investor Cathie Wood made headlines in 2020 when her flagship Ark Innovation ETF (AMEX: ARKK) gained 152.52%. Her biggest bets on electric vehicle manufacturer Tesla, Inc. (NASDAQ: TSLA) and Bitcoin paid off, making Wood one of the most successful investors of 2020. 

However, ARKK’s impressive gains were unsustainable, as it became one of the worst-performing ETFs in 2021. The surging volatility of the markets, frequent crypto market crashes, and Tesla’s steep valuation made the ETF lose momentum last year. 

Factors influencing the Ark Innovation ETF in 2022 are: 

 

Tech Sell-Off 

The Federal Reserve’s hawkish monetary policies have caused tech stocks to witness a major sell-off last week, as evident from the tech-heavy Nasdaq 100’s 4.46% decline. The increasing treasury yields have also contributed to the broader stock market rout, with industry leaders such as Tesla and Apple slumping 2.82% and 3.04% year-to-date, respectively. As a result, the Ark Innovation ETF declined 15.1% year-to-date. 

Regarding this, SoFi’s (NASDAQ: SOFI) head of investment strategy Liz Young said, “Investors are trying to wrap their heads around what different leadership looks like: we’ve all been conditioned that tech is the winner all day every day and that is just not going to be the case this year.”

 

Sector Rotation

Over the past two years, the technology sector benefitted from the pandemic-fuelled stay-at-home trends, causing major tech stocks to be the biggest gainers. Consequently, the tech-heavy Ark Innovation ETF became one of the best performing ETFs of 2020.

However, despite the rapid spread of the new Omicron variant, global economies have been recovering, with the focus shifting to industrial and manufacturing sectors. Popular tech stocks have taken a hit, with many companies adopting a hybrid working environment and schools and colleges partially reopening. 

ARKK’s biggest holdings include Tesla, which has an 8.55% weightage in the ETF, while Zoom Video Communication (NASDAQ: ZM) at 6.17%, and Roku Inc. (NASDAQ: ROKU),  at a 6% weightage. Over the past week, all three stocks have been red, with ZM and ROKU down 6.69% and 20.94%, respectively. In addition, the ETF has a 5.19% weightage in the crypto exchange stock Coinbase Global Inc. (NASDAQ: COIN), which slumped 7.94% over the past five days. 

The Chief Investment Officer and Managing Partner of Short Hills Capital Partners, Stephen Wiess, expects the ARKK ETF to fall further in the upcoming months, as the Fed’s hawkish monetary policy and rising bond yields are expected to maintain continuous pressure on high-growth tech stocks. 

 

Cryptocurrency Market Fluctuations 

The ARKK has indirect exposure to the cryptocurrency markets, as Coinbase is its 5th largest holding. Thus, the ETF is heavily influenced by the recent developments in the cryptocurrency markets. 

The crypto crackdown in China, coupled with increasing regulations regarding trading crypto in the United States, has caused COIN to slump since its market debut in April last year. Despite Bitcoin surging 70% in value in 2021, the cryptocurrency market remains more volatile than ever. 

Analysts expect the heightened market scrutiny and intensified crypto ban in various countries such as China and India can cause the decentralized market to crash in the upcoming months. Several crypto experts are betting on major decentralized currencies to decline more than 20% in the forthcoming months. Sussex University professor Carol Alexander predicts Bitcoin will wipe its gains over the past two years and decline to nearly $10,000 in 2022. 

 

Conclusion 

Cathie Wood’s ETF was definitely through the wringer in 2021, wiping most of the gains made in the previous year. The ongoing tech weakness and volatile crypto markets are expected to keep the Ark Innovation ETF under pressure this year as well.

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