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Why ARK Innovation ETF Is Down By 5% Today

By:
Vladimir Zernov
Published: Jan 10, 2022, 16:25 UTC

ARKK is trying to settle below the $80 level.

ARK Innovation ETF

In this article:

ARK Innovation ETF Drops Amid Sell-Off In Growth Stocks

ARK Innovation ETF found itself under strong pressure today as traders rushed out of riskier assets on fears that Fed will raise rates aggressively in 2022.

The market begins to price in as much as 4 rate hikes this year. Treasury yields are rising fast, and S&P 500 has already pulled back by about 5% from highs that were reached at the beginning of this year.

Stocks with high price-to-earnings ratios are losing ground fast, and ARK Innovation ETF’s holdings are concentrated in such stocks. The biggest ARKK holding, Tesla, is trading at more than 110 forward P/E. Roku is valued at more than 100 forward P/E while Teladoc is not profitable.

Other big holdings like Block, Zoom, Shopify and Spotify are also richly valued, and there is a lot of potential for multiple compression.

What’s Next For ARK Innovation ETF?

ARKK has found itself in a challenging position as the stocks in the fund’s portfolio are all under pressure. There is no real diversification as they all belong to the same market segment, which is currently moving lower.

Traders should focus on the fate of Tesla, which is the bright spot in ARKK portfolio. In case Tesla begins to fall at a faster pace compared to its normal volatility, a true panic may emerge in ARKK.

It should be noted that ARKK biggest holdings remain very expensive by traditional metrics even after the huge pullback. Thus, if the market stays focused on valuation concerns due to rising rates, these holdings will have plenty of room for additional downside.

Tesla is holding reasonably well because Tesla’s growth story is very strong, but other stocks do not have such powerful stories which can offset current market concerns.

To have upside, ARKK needs a change of market sentiment, which will likely depend on Fed’s comments and the trajectory of Treasury yields. If current trends persist or Fed becomes even more hawkish, ARKK will remain under material pressure.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

Vladimir is an independent trader and analyst with over 10 years of experience in the financial markets. He is a specialist in stocks, futures, Forex, indices, and commodities areas using long-term positional trading and swing trading.

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