Investors in popular exchange-traded funds (ETFs) are understandably frustrated this year, as many funds underperform compared to the S&P 500’s impressive gains. Among the lagging ETFs, a few familiar names stand out, including Cathie Wood’s once star-performer, ARK Innovation (ARKK). Notably, even dividend-paying and small-cap value ETFs haven’t been spared in the current market turbulence.
The Curious Case of ARK Innovation
The 7% decline in ARKK is particularly stark, especially in light of its massive 67.6% surge in 2023. This reversal of fortune has put the spotlight on the fund and raises questions about its prospects.
One of our analysts points out that Tesla’s (TSLA) disappointing performance has undoubtedly been a headwind for ARKK. Tesla’s hefty weighting in the ETF, coupled with its sharp decline this year, creates a significant drag. Tesla’s underwhelming first-quarter results in both profit and revenue have further dampened investor enthusiasm for the stock.
However, another analyst highlights that ARK Innovation’s challenges extend beyond Tesla, with over three-quarters of its holdings in the red this year. This underperformance suggests that the broad focus on disruptive technologies within the ETF might now be out of favor. Interestingly, the fund designed to bet against ARKK, AXS Short Innovation Daily ETF (SARK), has seen an uptick this year, further illustrating this potential shift in perception.
Growth & Momentum Dominate, Laggards Emerge
Currently, the market seems heavily tilted towards momentum and growth stocks. ETFs that stray from these themes are facing increasing pressure. Only a minuscule number of actively traded U.S. diversified stock ETFs show losses this year, yet some of those losses are quite substantial.
An analyst observes that the steep decline of the Invesco WilderHill Clean Energy ETF (PBW) is a prime example. The fund’s heavy investment in clean energy, particularly solar companies like Sunnova Energy (NOVA), has become a liability amidst rising uncertainty around government incentives for the sector.
Small Value & Dividend Casualties
The long-awaited renaissance of small-cap value stocks and high-dividend ETFs has yet to materialize. Some well-known ETFs in these categories, such as the Vanguard S&P Small-Cap 600 Value and Invesco High Yield Eq Dividend Achievers ETF (PEY), have shown disappointing returns.
One analyst suggests that higher interest rates play a role in these trends. Safe, short-term Treasuries now offer higher yields, reducing the relative attractiveness of riskier dividend-focused ETFs. Similarly, small-cap value companies often require debt financing for expansion, an increasingly expensive proposition in the current interest rate environment.
Key Takeaways
This snapshot of the ETF landscape provides important lessons for investors. Foremost, it’s a clear reminder that the popularity of market themes can be fleeting and that even high-profile fund managers are not immune to shifting winds. Furthermore, the stark differences in performance between various ETFs drive home the message that understanding a fund’s underlying investment strategy is essential before investing. As the market landscape continues to shift, paying close attention to your holdings and their key drivers will be crucial for making informed decisions as an investor.