Hopes of investors of a more accommodative stance from the Federal Reserve in the foreseeable future were crushed by the recent employment data that crushed all estimates.

With 11 million job openings, just shy of two for every available worker, in December, Jerome Powell’s concern regarding an “out of balance” labor market may become a headache for investors and business owners if the Central Bank tightens the monetary screw more than expected and overcooks the economy toward a severe downturn.

With market volatility expected to continue in the foreseeable future, it could be wise to avoid, or at least trim, exposure to businesses that are yet to find their way to consistent profitability and stand to have their growth prospects hurt by increasing borrowing costs.

ARK Innovation ETF (ARKK) is the flagship actively managed fund from ARK Invest, an advisory firm led by renowned investor Catherine Wood. The fund seeks to generate long-term capital appreciation by investing in businesses across the globe that seeks to benefit from disruptive innovation.

ARKK has slumped 13.9% over the past six months and 37.9% over the past year to close the last trading session at $42.85. The fund’s NAV was $42.83 as of February 3, 2023.

AUM and Holdings

With around $8 billion in AUM, ARKK’s top holding is Tesla Inc. (TSLA), with an 8.93% weighting in the fund, followed by Zoom Video Communications, Inc. Class A (ZM) at 8.22%, and Exact Sciences Corporation (EXAS) at 7.32%. It has a total of 30 holdings.

More Expensive Than Peers

ARKK’s expense ratio is 0.75%, higher than the category average of 0.50%. The fund has not paid any dividends for the past eight quarters.

Higher Volatility

The fund flows came in at a negative $24.7 million over the past month and a negative $222.95 million over the past three months. It has a beta of 1.58.

POWR Ratings Reflect Weakness

ARKK has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ARKK has an F grade for Buy and Hold due to the wide gap between its current price and its 52-week high price of $78.25.

ARKK’s rank of #88 among 118 funds in the B-rated Technology Equities ETFs group has earned the ETF a D grade for Peer.

Beyond what has been discussed above, additional ratings for ARKK can be found here.

Bottom Line

Growth stocks have found the going tough of late. Firstly, most of their optimistic plans and projections based on assumptions of a permanent digital shift were humbled by the reality check of widespread reversion to a pre-pandemic or hybrid lifestyle.

Moreover, stubbornly high inflation and efforts to control have hurt them on both fronts, with softened demand due to decreased discretionary expenditure further compounded by progressive increases in the cost of their debt-fueled survival.

Given this backdrop, it could be wise to avoid ARK Innovation ETF (ARKK), whose bets in disruptive technology-oriented businesses expose it to the risk of losing significantly in the year ahead.

How does ARK Innovation ETF (ARKK) Stack up Against Its Peers?

ARKK has an overall POWR Rating of D, which equates to a Sell. Hence, you might consider looking at its Technology Equities ETFs category peers, Technology Select Sector SPDR ETF (XLK), VanEck Semiconductor ETF (SMH), and iShares Exponential Technologies ETF (XT), with an A (Strong Buy) rating.

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ARKK shares were trading at $42.40 per share on Monday afternoon, down $0.45 (-1.05%). Year-to-date, ARKK has gained 35.72%, versus a 7.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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