ARKG: Don’t Expect Any Favorable Return In Short Or Medium Term

When I covered ARK Genomic Revolution ETF (BATS:ARKG) last time, the stock opened at $40.63 on 24th February, 2022. Since then, the price shot up by 22 percent to reach $49.25 on 5th April; and then dropped down to a 52-week low of $28.76 on 10th April. As a result, the stock is trading at a discount of almost 30 percent of its February 24th price. This downward rally is very much along expected lines, which was broadly discussed in my earlier coverage. The price multiples and simple moving averages were indicative of a fall in the short run.

As the name suggests, this ARK Genomic Revolution ETF is based on the theme of genomic revolution. That means, ARKG primarily invests in companies that are engaged in the research of genomic sequencing, analysis, synthesis or instrumentation. ARKG has more than 40 percent investments in mid-cap ($2 billion to $10 billion) firms, while the remaining portfolio is almost equally distributed between small-cap and large-cap companies. In terms of technological breakdown of its portfolio, molecular diagnostics (22 percent), bioinformatics (18 percent), and beyond DNA (17 percent), constitute the majority of its investments.

I mentioned in my last coverage that ARKG being a passive fund reshuffles its portfolio quite often, and targets a few alpha producing stocks. ARKG invests in such stocks when the price is low and liquidates as soon as those stocks generate a significant growth. This genomic revolution ETF then uses this money to buy large-cap stocks. As a result, I can witness a notable change in the portfolio of ARK Genomic Revolution ETF during the past 12 months.

ARKG has invested almost 70 percent of its total fund in 18 stocks, mostly from the biotechnology sector. One year ago, these stocks held only 36 percent of the portfolio, i.e., almost half of current level. Ten new stocks have become part of its top 70 percent investments, namely Signify Health, Inc. (SGFY), Incyte Corporation (INCY), CRISPR Therapeutics AG (CRSP), Intellia Therapeutics, Inc. (NTLA), Beam Therapeutics Inc. (BEAM), Schrödinger Inc. (SDGR), 908 Devices Inc. (MASS), Adaptive Biotechnologies Corporation (ADPT), UiPath Inc. (PATH), and Ginkgo Bioworks Holdings, Inc. (DNA).

ARK Genomic Revolution ETF benchmarks the performance of its portfolio against the S&P 500 Index and the MSCI World Index. Unfortunately, this ETF’s price performance is in no way close to either of the above-mentioned indexes in the short term. ARKG’s price dropped by 42 percent during the past 3 months and 63 percent in the past 12 months. On the other hand, MSCI’s price dropped by 12.8 percent and 8.3 percent over the past 3 months and 12 months, respectively. The S&P 500 index, too, generated a very low negative return of 9.3 percent and 3.6 percent during the past 3 months and 12 months, respectively.

Moreover, this ETF has an extremely low dividend yield of less than 1 percent. I mentioned this last time, too, that since its incorporation in 2014, the fund declared annual dividends only in the past two years – $0.7901 in 2020, and $0.3824 in 2021. Thus, the overall return of this ETF has been extremely poor. Not only over the past three months or one year, this fund has generated negative growth over the past three years.

Despite such poor price performance, and the stock being traded at its 52 week low, the price multiples are still around the category average. I expected the price multiples to be quite low on the current price point. A price/earnings of 17.95, Price/Cash Flow of 12.61 and Price/Sales of 1.23 can in no way indicate an undervaluation. Only the Price/Book ratio is considerably low at 1.06. Thus, there is every possibility of a further price drop of ARK Genomic Revolution ETF.

A look into the technical indicators of ARK Genomic Revolution ETF provides a very pessimistic scenario. The 200 days simple moving average (SMA) is at 61.7, which is 31 percent higher than 100 days SMA of 47.11. Similarly, the 50 days SMA of 41.78 is about 22 percent higher than the 10 days SMA of 34.21. Such huge gaps in SMAs makes this ETF highly susceptible to steep price loss in the coming future. I at least don’t see any scope of significant price rise of this genomic revolution based ETF.

The only positive thing about ARK Genomic Revolution ETF is its 52 percent growth over the past five years, and 55 percent growth little over the past eight years (since its inception). However, that return is too little, and in the absence of any significant dividend yield and positive price growth in the short and medium term, is unacceptable to me. Thus, I’d like to stay away from investing in this fund for the time being. However, I’ll surely reassess this fund, if the price drops down further by another 20 percent.

Equity shares of ARK Genomic Revolution ETF are currently trading around $30, and a drop of 20 percent will make the stock reach $24. In my opinion this is a very likely possibility. I’ll thus suggest that existing investors hedge their exposures by buying January 20, 2023 (8 months forward) put options at an exercise price around $24. As the $25 January 20 put options are available at a very low premium of $1, it’ll be wise for the existing investors to buy this option, so as to minimize their losses to a maximum of 20 percent from the current price level. However, this is only applicable to the risk-bearing long term investors who are willing to bet on the future growth prospects of genomic revolution.