ARK Fund declines: High Interest Rates Claim Another Victim

ARK Fund, the actively managed Exchange-Traded Fund (ETF), has declined since September 2022 due to a high policy interest rate. Cathie Wood’s ARK Fund, under normal conditions, invests nearly 65% of its assets in domestic and foreign securities, with a focus on companies working on disruptive innovation. 

The non-diversified fund could invest in both developing and emerging markets. Also, it could invest in securities listed on foreign exchanges, American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs). The previous 1-year return was negative 39.55%. With dividends of $0.52 and Year To Date (YTD) returns of 19.44%, net assets are at $6.98 billion. 

Source: ARKK; USNews

ARKK Decline

Major declines in the fund are visible in Tesla Inc and 2U Inc., pushing the fund to its worst weekly decline since September 2022. At the same time, the Federal Reserve is apparently ready to raise interest rates again. Their top-holding – Tesla, is down by 11%, and 2U is down by nearly 18% this week. 

Coupled with other lows, the overall health of the fund is down by 10% for the week which is reportedly the worst weekly performance since there was an 11.1% decline in the week ending on September 23, 2022. Data suggests that none of the 27 companies in the fund’s portfolio was in the greens this week. 

Possible Reasons for Decline

The fund is worth $7 billion and managed to touch the skies during the pandemic lockdown time of 2020, and is also viewed as a parameter for investors’ tolerance for indulging in riskier assets. Moreover, the overpowering message from Jerome Powell, Federal Reserve Chair, delivered before Congress this week, hinted rate hikes in a bid to curb high inflation. Despite multiple massive rate hikes, the inflation is yet to recede to a tolerable level. 

More rate hikes would weigh heavily on tech stocks, mainly by increasing the cost of borrowing and decreasing the value of future profits expected. 

Speculation circulating in the market is that there a 49% chance that the Federal Reserve will raise interest rate by 50 basis points or a range of 5% to 5.25%. The tentative chance percentage was just 28% last week. 

Todd Rosenbluth, head research data analyst at VettaFi, sees ARK as a good barometer for checking markets’ sentiments toward high-risk and higher-reward investments. Moreover, this ETF declines when the general investor mindset moves toward a risk-off scenario. A possible reason for it could be attributed to the fact that fund investments in securities were tied to long-term scenarios. 

The fund recorded its best monthly performance in January 2023, where it managed to gain 25%. It remains up by 17% year to date. 

Inflation Rate Scenario

The Federal Reserve is raising its policy rate to fight inflation. Inflation rate at the time of writing was 6.4% for 12 months ending on January 2023, which rose to 6.5% as per data from the US Labor Department published on February 14, 2023. Evidently, inflation is not lowering, hence the rise in the Fed rate. The next inflation update is scheduled to come out on March 14, 2023, at 8:30 ET and would provide 12 months of data ending on February 2023. 

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Source: https://www.thecoinrepublic.com/2023/03/12/ark-fund-declines-high-interest-rates-claim-another-victim/