Investors hanging onto shares of Cathie Wood’s line of ARK Exchange-Traded Funds (ETFs) may be ready to throw in the towel after mostly missing out on the impressive tech-led gains over the past two years or so. Indeed, it should be no surprise to witness the larger magnitude of cash outflows from funds such as the flagship ARK Innovation ETF (NYSEARCA:ARKK).
The tech fund based on innovative and highly disruptive hyper-growth companies had its moment in the spotlight back in 2020. Since then, the ETF has been in a downward spiral and a severe market underperformer.
As you may know, the smaller hyper-growth companies that aim to disrupt often tend to benefit from lower interest rates. Such firms must invest as much as possible in their disruptive growth drivers. And when borrowing costs are lower, they may have more of an edge to take on the heavyweights in their crosshairs.
Key Points About This Article
- Lower rates alone may not be enough to power a massive bull run in the ARK ETFs.
- AI and other technologies could help specific holdings power the ARK to decent results in the coming years.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Lower Rates are Here. Could ARKK Be Primed to Pop Again?
Now that the Fed has dealt us a big rate cut, with hints and promises of more to come in the year ahead, questions linger as to whether the Cathie Wood stocks have what it takes to experience a renaissance of outperformance again.
Indeed, the 2021-22 sell-off in ARKK in anticipation of higher rates led to the ETF’s demise. So, would reversing course on rates cause a proportional recovery in ARKK and the rest of the Ark Invest family of ETFs?
That’s the big question. Arguably, last week’s big Fed rate cut should have already injected enthusiasm into the Ark funds. With shares of ARKK now up more than 13% from their early-September lows, it seems like the ARK funds have some momentum to build on. While the Fed may seemingly be in the driver’s seat for Cathie Wood’s Ark, investors should pay more attention to the types of companies that make up the ETFs.
Some are well-equipped to ride higher, regardless of where rates go next. Others have seemingly lost their competitive edge and may be destined to be perennial underperformers, even as rates drop like a rock from here.
Which Stocks Could Keep Weighing Down Cathie Wood’s ARKK?
Shares of Roku (NASDAQ:ROKU) and Block (NYSE:SQ) were big losers during their respective crashes, which began in 2021. Interestingly, the charts of both ARK holdings seem pretty similar: a parabolic surge in 2020 that resulted in a double-dop pattern and a painful crash that wiped out the pandemic-era gains.
Though there has been some near-term gain in the two names, likely due to lower rates and better quarterly results, their shares remain down more than 75% from their all-time highs. While both companies have some impressive technologies brewing behind the scenes, it seems as though competitive pressures have gotten the better of them.
Whether we’re talking about Roku and its powerful rivals in video streaming or Block and the non-stop competitive pressures targeting fintech, it seems like both firms need to better differentiate themselves if they seek to make a run for prior highs. Personally, I think that even markedly lower rates won’t be enough to power these Cathie Wood holdings higher anytime soon.
Fortunately, there are very intriguing firms that do possess competitive advantages and could rise to do more of the heavy lifting once rates fall and their new innovations come to be.
Which Cathie Wood Stocks Could Emerge as the New ARKK Leaders?
Most notably, Tesla (NASDAQ:TSLA) and Roblox (NASDAQ:RBLX) are two fallen firms that have lots of potential to gain on the back of new artificial intelligence (AI) innovations.
For Tesla, it’s robotaxis and warehouse robots, which could help Elon Musk’s dodge and weave past what remains of the headwinds facing the electric vehicle (EV) market. As for Roblox, it’s actively integrating generative AI into tools that can better enable its creators to produce more engaging experiences across its platform.
In essence, AI can help Roblox’s flywheel spin that much faster. And I don’t think the full impact of the technology is baked into shares quite yet. In any case, Roblox stands out as being in the sweet spot with its metaverse and AI exposure.
With RBLX stock gaining 75% in the past year, perhaps the video-game firm could stand out as one of the ARK stocks that helps the ETF really pick up traction again.
The Bottom Line
The ARKK may not be destined for a run to prior highs just because rates are heading lower again. That said, Cathie Wood could tilt the odds in her favor as she looks to scoop up the shares of discounted innovators at potentially bargain-basement prices. Tesla and Roblox remain fairly sizeable core holdings in the ARK, and arguably, they’re close to the cheapest they’ve been in a while.
Should Wood start buying more aggressively, perhaps ditching the ARK funds and Cathie Wood could prove a mistake. Most of the damage seems to already be in the books. And there’s plenty of room for optimism as strength broadens to the innovations beyond the Magnificent Seven.
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