Ever since the macroeconomic environment changed, the market has reacted. The Fed does not seem to be so accommodative as before, and therefore the valuations of some of the high-flying tech stocks have come down. However, some of these companies still have very high valuations.
Despite that, we have seen multiples compress across the board. Some of the best-performing funds that were highly invested in this sort of stock are now facing outflows and redemptions that pose a threat to their future. Yes, we are talking about Ark, and how its flagship ETFs seem to be underperforming this year. Their long-term performance has also been highly affected.
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Ark dealing with outflow
Ark seems to be dealing with a clear problem, they are too invested in the same companies. If you carefully analyze most of the holdings in their ETFs, you will see that they share most of the same names. Their ownership in a total of some of these stocks is way too high. This creates a situation whereby if the fund is forced to sell a stock, it will push down the value of their same holding in another fund.
Adding to that some of the stocks are highly illiquid, which can force the price to go even lower on some of these names. So far it is still too early to say exactly what happens, but it seems like choosing high-beta stocks during a bull run is after all not a genius move, it is just how markets work. Some of the investors that followed the same investing and research approach are now dealing with the fact that the value of stocks cannot be on the stratosphere forever.
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