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Rally in Cathie Wood’s Fund Offers Hint of Optimism in Slumping Market


Shares of the fund, which is largely populated by growth-oriented technology companies, have advanced 17% since bottoming May 11. They have outpaced the S&P 500, which has edged up 4.4% over the same period. 

The fund, which is known by its ARKK ticker symbol, remains down 54% in 2022 and has been one of the highest-profile victims of the Federal Reserve’s aggressive campaign to raise interest rates to bring down red-hot inflation. 

A major theme in markets this year has been the return to earth of stock valuations that grew exceedingly rich as the Fed slashed interest rates to near zero and the government flooded the economy with fiscal stimulus. The compression has been severe in pricey corners of the market, like the tech sector, where stocks command hefty valuations based on expectations of growth.

Worries about how high and how fast the Fed will raise rates have spurred debate about whether the economy is headed toward a recession, which would likely send markets tumbling anew. Although recent economic data don’t point to one in the near term, the broader stock market doesn’t appear to be ruling anything out. 

Two weeks ago, the S&P 500 was teetering on the cusp of a bear market, down nearly 20% from its Jan. 3 record. Since then, it has rallied 5.3%, cutting its losses for the year to 14%. It ended last week little changed.

“A bear market, that’s what makes it vicious: There’s extended periods where you can get significant rallies and it coaxes people back into the market thinking that the floor is in,” said Dan Irvine, principal at 3Summit Investment Management in Vienna, Va.

In the week ahead, investors will be looking to Friday’s inflation report for signs that price pressures are subsiding, a development that could feed into expectations of how high the Fed will ultimately raise rates. 

Many analysts say they expect conditions will remain difficult for stocks like those in the ARKK fund. Central bank officials are expected to approve half-point interest-rate increases at their June and July policy meetings, further pressuring the stocks.

ARK Investment Management didn’t respond to a request for comment.

ARKK focuses on the theme of “disruptive innovation,” with top holdings including

Zoom Video Communications Inc.

,

Tesla Inc.

,

Roku Inc.

and

Block Inc.

It also has positions in

Teladoc Health Inc.

,

Coinbase Global Inc.

and

Robinhood Markets Inc.

Some of the companies don’t consistently turn a profit and are valued on expectations of strong growth. That makes them especially vulnerable to higher borrowing costs.

“Now if clients ask about ARKK, they’re saying, ‘Well, maybe I should invest in ARKK now because how much further could it go down?’” Mr. Irvine said. “Usually what I tell people is—a lot further than you would expect or think possible.”

Even after falling sharply, some ARKK holdings still carry lofty valuations. Tesla traded late last week at 56.2 times its projected earnings, down from 120 times at the end of last year. For other ARKK holdings that aren’t yet consistently profitable, price-to-earnings ratios can’t be tracked.

At its recent peak in September 2020, the S&P 500 traded at 24.1 times its projected earnings over the next 12 months, according to FactSet. By late last week, it was trading at 17.7 times earnings, near its 10-year average of 17.1.

The S&P 500’s technology sector traded last week at 21.5 times future earnings, down from a multiple of 28.9 in September 2020. 

Ms. Wood’s flagship fund captured imaginations when its shares more than doubled in 2020 and investors piled into risky bets from unprofitable tech stocks to novel cryptocurrencies, special-purpose acquisition companies and nonfungible tokens

“The same people who were asking me about dogecoin or were asking us about the most recent SPACs or NFTs were the people asking about the ARKK fund,” said

Peter Mallouk,

president and chief executive of wealth-management company Creative Planning in Overland Park, Kan. 

“It was basically just people feeling like they were missing out on something that was part of the new world of investing.”

Financial advisers say some investors are interested in picking up shares of the ARKK fund at what look like bargain prices compared with the previous two years.

Among the stocks that have lifted ARKK higher since the May low: Zoom, up 29%; Roku, up 11%; Block, up 17%; and Coinbase, up 24%. Tesla has fallen 4.1% over that time. Despite the recent rally, all five stocks are still down by double-digit percentages this year, from Tesla’s 33% decline to Coinbase’s 74% slump.

At least some of ARKK’s holdings might have benefited from short sellers buying shares to close out their bets against the stocks. Short sellers have been covering positions against Zoom in recent weeks, according to data from S3 Partners. Short bets against other major holdings, including Tesla and Block, increased lately.

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The ARKK fund’s recent rally has coincided with a pullback in Treasury yields. The yield on the benchmark 10-year U.S. Treasury note settled Friday at 2.955%, down from a high of 3.124% on May 6.

Still, investors continue to funnel money into ARKK. They have put more than $1.3 billion into the fund this year, including about $500 million in the past month, according to FactSet data through Thursday.

Many shareholders say they are willing to overlook the volatility because they believe in the fund’s potential as a long-term investment.

“ARKK represents the future,” said Judith Lu, founder and chief executive at Blue Zone Wealth Advisors, who owns ARKK in her personal investment account. “It’s disruption, it’s innovation, and disruption doesn’t happen in a linear fashion.”

Ms. Lu said she tells clients that if they plan to add ARKK to their portfolio, they should be prepared for a bumpy ride.

“Cathie Wood is investing for the future, not for today and not for this month,” she said.

Write to Karen Langley at karen.langley@wsj.com

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