Why has Ark unloaded its China tech holdings?

Having dazzled investors with gains of almost 150% through 2020, the ARK Innovation ETF [ARKK] has slumped in 2021 so far.

This article was originally published on OptoInvest in the Next Big Idea.

This year started brightly for the ARK Innovation ETF, with gains of 22.2% in the opening six weeks of the year to close 16 February at $156.58. However, the ARK Innovation ETF has been unable to sustain this and has fallen 2.2% in the year to 22 July, closing at $121.71.

A rapid fall saw the ARK Innovation ETF crash 29.6% to $110.26 by close on 8 March. Despite a partial rally through April, worse was to follow for the ARK Innovation ETF, which bottomed with a close of $99.48 — down 20% from where it opened the year — on 13 May. The ARK Innovation ETF has partially recovered since, and thanks to rapid gains in late 2020 still trades 49.8% above its level 12 months previously.

Chinese tech disposal

Celebrated investor, and founder and CEO of ARK Investment Management, Cathie Wood has sold off Chinese tech stocks from her firm’s biggest fund as she warns of a “valuation reset” in the Chinese tech industry.

According to Bloomberg, weightings of Chinese tech stocks in the ARK Innovation ETF fell from 8% in February to below 1% by 14 July, while the equivalent figure for the ARK Next Generation Internet ETF [ARKW] fell to 5.4%, its lowest level compared with month-end figures since October 2014, when Bloomberg began tracking the data.

However, weightings of Chinese stocks in the ARK Fintech Innovation ETF [ARKF] have remained stable at around 18% for the moment.

One of the key stocks jettisoned by the ARK Innovation ETF is Tencent [TCEHY]. The firm sold 292,468 shares in the Chinese tech giant on 15 July. Ark reportedly made a loss on a number of the Tencent shares it bought just months previously. Ark has reportedly sold one million Tencent shares since February.

Ark founder and CIO Wood said, “From a valuation point of view, these stocks have come down and again from a valuation point of view, probably will remain down,” adding “I do think there’s a valuation reset.”

Wood’s comments came amid the latest wave of regulations from the Chinese government against the country’s growing technology industry. The government is so concerned by the expansion of these platforms that it has introduced a raft of new regulations in areas such as anti-monopoly restrictions and data security in an attempt to curtail their growth. Ecommerce giant Alibaba [BABA] fell afoul of one of the first such anti-monopoly probes, and was punished with a $2.8bn fine.

Surprising market responses

Ark’s China tech dump seems to have reinvigorated the market for the sector. The KraneShares CSI China Internet ETF [KWEB] saw inflows of $631m in the week to 16 July, including two days of record inflows. Chris Murphy, co-head of derivative strategy at Susquehanna, speculated that “[m]aybe Cathie Wood’s getting out was the final [contrarian] sentiment indicator those investors needed.”

The argument, according to Murphy, is that the threats posed to Chinese tech platforms by Beijing’s crackdown is already baked into their stock valuations, while US tech stocks are arguably seriously overvalued at present.

The ARK Innovation ETF’s 2021 is better than that of the KraneShares CSI China Internet ETF, which fell 20% over the same period. Over the trailing 12 months, however, the ARK Innovation ETF’s gains of 49.8% are far greater than those of KWEB, which fell 7.37% over the same period. ARKW, the other Ark fund that has shed its Chinese tech shares lately, fell 3.95% in the year to 19 July but gained 49.05% over the trailing 12 months.

Not all Ark’s funds have fallen in value this year. Both ARK Fintech Innovation ETF and the ARK Autonomous Technology & Robotics ETF [ARKQ] posted gains (of 6.8% and 6.4% respectively) in the year to 22 July, and have both grown by 51.9 over the past 12 months. Chinese e-commerce site JD.com [JD] just makes it into the former’s top ten holdings with 3.16% weighting as of 22 July, but appears to be dragging on the fund, as its share price fell 13.6% in the year to 22 July.

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here

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