What happened
Shares in Cathie Wood's ARK Innovation ETF (ARKK -3.12%) were down almost 17% in the week to midday Thursday. The ETF's stock price tends to follow the net asset value (NAV), so the primary reason is apparent -- the ETF's stocks are falling.
Image source: Getty Images.
The ETF's raison d'etre is to invest in "a technologically enabled new product or service that potentially changes the way the world works." As a result, it tends to be full of relatively speculative companies rather than technology companies with long-established earnings in mature markets. Given the kind of correction in the marketplace and a general environment of investors taking "risk" off the table, it's hardly surprising that this strategy has underperformed.
Moreover, the ETF tends to be relatively concentrated, with its top 10 holdings responsible for around 59% of its NAV. When a fund holds a high weighting in a relatively small number of holdings, it tends to lead to greater variance in performance -- great when it works, horrible when it doesn't.
The chart below breaks out the top 10 stocks in the ETF and how they have performed recently.
Data by YCharts
So what
If you trust in Wood's stock-picking ability and are looking to take advantage of the market dip, the ETF's underperformance will attract you to buy in. But, unfortunately, there's little Wood can do about market conditions or the host of headwinds (supply chain challenges, soaring raw material costs, rising interest rates, the war in Ukraine) facing corporations right now and impacting their willingness to spend on tech.
Now what
Until the macroeconomic uncertainty resolves, so-called "risk assets" will come under pressure, so don't be surprised if weakness persists. Still, nobody rings a bell at the bottom of the market, and if the headwinds discussed above prove temporary, then Woods' ETFs will surely recover in due course.
