Kathy Wood’s ARK faces loyalty test after tech-stock route

Over the past week, prices in the ARK Innovation ETF have returned to mid-2020 levels, according to FactSet, with investors pouring nearly $168 million into the fund, bringing its net worth to $11.8 billion. That’s a vote of confidence for a fund that has dropped 27% this month and lost half its value over the past year, largely because its brand of investing in unprofitable, untapped firms has fallen out of favor.

Larry Carroll, a financial advisor at Wealth Enhancement Group in Rock Hill, S.C., still has some $18 million in client money at ARK Innovations after buying shares in 2018. The firm manages $55 billion in a portfolio of stocks and bonds with Mr. Carroll. Using ARK Innovations as a way to expose some of the customers to hot tech companies.

Thanks to ARK’s swift run-up in the early stages of the pandemic, he says he has already pulled more money out of the fund than he originally put in, allowing him to retain a key position in the hope. It was easy that depressed stocks would bounce back.

“The real question is whether we should buy more,” Mr Carroll said. “I’ve resisted the urge mainly because I don’t think you’ll see ARK and disruption stocks do well in this environment.”

What happens next in the ARK Innovation Fund, which goes by the ticker ARKK, and other risky investments like it will help tell the story of the financial markets in 2022. Ranging from the most speculative asset, ARK and many of its holdings that are known as meme stocks like Gamestop Corp and AMC Entertainment Holdings Inc. to cryptocurrencies such as bitcoin, during the pandemic huge amounts of governments and central banks have been working to combat the effects of lockdowns. put into the economy. Now those gains are waning as the Federal Reserve prepares to raise US interest rates as soon as March, prompting a change in investor behavior and a rethinking of risk appetite.

Ms. Wood’s ETFs are at the epicenter of a stock-market selloff that pushed the S&P 500 down 7% and the Nasdaq Composite down 12% in just four weeks into 2022. The worst-affected are stocks of technology and biotech firms that generate little to no profit, yet carry high valuations—the kind of companies favored by Ms. Wood’s ARK.

Some of the holdings of the ARK Innovation ETF are down more than 50% from their recent highs, including Spotify Technology SA, Block Inc., Zoom Video Communications Inc. and Roku Inc.

Ms. Wood stressed that the fund’s holdings are due for a rebound. “After nearly 11 months of correction, innovation stocks have entered deep value territory, their valuations at a fraction of peak levels,” she wrote in a blog post last month.

Funds that outperform the market often go through phases where they lag behind, although Arc’s volatility scale sets it apart. According to data from FactSet, investors pulled out a net $1.4 billion from ARK funds in the past month, the most redemptions of any US ETF issuer. It has pushed net outflows to more than $8 billion over the past six months, which is more than all net outflows experienced by other ETF managers in the same period.

Some $16 billion in ARK Innovation flowed from the second quarter of 2020, when the Covid-19 pandemic took hold, through the first quarter of 2021, when the fund’s assets peaked at $28 billion. Vincent Delouard, director of global macro strategy at StoneX Group Inc., said investors who have since been buying have been losing money.

ARK’s client-portfolio manager Renato Leggi said some investors are beginning to agree with Ms. Wood’s assessment last week and are buying shares. He said the firm’s strategy requires investors to take a long-term view.

But Klaus Derendorf, a 50-year-old business-development executive from Los Angeles, said he sold shares of his ARK Innovation Fund in November and has increased his cash holdings after losing nearly 20% at the fund in less than a year. “I have to go back to the real fundamentals,” he said.

Ms. Wood’s early returns earned her a huge following on YouTube, Twitter and other social-media platforms. Chicago-based sales director Joe Seid, 58, bought ARK Innovation shares in late 2020 after he saw them on TV and his financial advisor labeled the fund one of the hottest in the market. He sold it last year after losing 10% of his investment and now thinks he must have been swept away.

“To me, these were too speculative,” said Mr. Seid. “It didn’t really joke with the more basic financial beliefs.”