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March 31, 2020 | Commentary
During the first quarter, broad-based equity indexes – as measured by the S&P 500 and MSCI World – hit all-time highs shortly before falling into a sudden, sharp 30%+ bear market. March marked the worst month since 2008 as investors sold stocks indiscriminately on fears of the impact of the coronavirus (COVID-19) on economic activity. As nations responded with extreme measures to “flatten the curve” and slow the spread of COVID-19, fears of a global recession, if not depression, mounted. According to the CBOE VIX, the volatility of the equity markets spiked to closing levels above those hit during the global financial crisis in 2008. U.S. Treasury yields plunged to record lows, with the 10-year yield dropping well below 1%. That said, the Fed eased so aggressively that yield curves steepened suddenly and significantly.
While the panic appears to have subsided, the equity market could be in a so-called bottoming process and could remain choppy. In our view, the markets discounted a significant amount of bad news and could have overdone it. If anything, the stock rout highlighted the seriousness of COVID-19, not only galvanizing the government policymakers around the world into sweeping moves to mitigate and reverse its impact on the global economy but also impressing upon individuals and businesses the importance of contributing to the solution with social distancing and better hygiene. Meanwhile, while detrimental for oil producers, we believe the oil price drop ultimately will result in a significant increase in purchasing power for most consumers and businesses, as was the case in early 2016.
As COVID-19 has strengthened its grip on the global economy, we are gratified that government policymakers are laser-focused on cushioning the blow and partnering with companies offering innovative solutions to the problems the disease is causing. During times of fear, uncertainty, and doubt, businesses and consumers are more willing to change their behavior and seek innovative products and services that are more productive, cheaper, faster, and/or more creative. As a result, innovation takes root and typically gains significant market share during tumultuous times, such as this pandemic appears to be.
Relative to the S&P 500 Index and the MSCI World Index, ARK’s five actively managed ETFs outperformed during the first quarter. ARK’s self-indexed strategies, The 3D Printing ETF (PRNT) and the ARK Israel Innovative Technology ETF (IZRL), underperformed the previously noted indexes as well as their own benchmarks.
To read a summary of ARK’s biggest contributors and detractors, please see below.
The ARK Autonomous Technology and Robotics ETF (ARKQ) outperformed the broad-based market indexes during the quarter. Among the top contributors to performance was Tesla (TSLA). While Tesla suspended production at its Fremont factory in the California, it resumed Shanghai production on the first working day after the extended Lunar New Year break in China. The Chinese government supported Tesla with masks, disinfectant, other supplies, and dorm rooms to protect its workers. ARK believes that the auto industry will begin to consolidate sooner than anticipated in response to the COVID-19 crisis, and that Tesla will gain market share as it is well ahead of the curve on electrification and autonomy. Materialise (MTLS) contributed positively as 3D printing has been enlisted to create parts for COVID-19-related equipment like ventilators, nasal swabs, and face mask shields. In most cases 3D printers can print parts much more quickly and inexpensively than traditional manufacturing processes. Among the top detractors during the quarter were Aptiv (APTV) and Proto Labs (PRLB). Aptiv’s stock fell as the auto industry shut factories in response to COVID-19. In March, the company drew down the remaining $1.4 billion from its revolving credit facility and suspended its dividend. Proto Labs’ (PRLB) first quarter guidance fell below analyst expectations because it is in the final stages of a company-wide system update that will detract from short-term earnings but will modernize its software architecture and offer better customer-facing systems. As a quick-turn manufacturing service, we believe Proto Labs is well positioned to help alleviate part shortages caused by COVID-19.
The ARK Next Generation Internet ETF (ARKW) outperformed the broad-based market indexes during the quarter. Among the top contributors was Tesla (TSLA) for reasons noted above. Teladoc (TDOC) also contributed as the adoption of virtual care services accelerated during the outbreak of COVID-19. Teladoc’s telemedicine infrastructure scaled successfully as thousands of patients and physicians sought to interact digitally. The secular shift towards virtual care should increase physician productivity and patient satisfaction. Among the top detractors were Roku (ROKU) and LendingTree (TREE). Roku detracted from performance on fears of a COVID-19-related decline in advertising, a sharp falloff from its 78% year-over-year revenue growth reported last quarter. Evolving into an operating system as television shifts from linear delivery to “over the top” (OTT) broadband delivery, Roku should be able to capture a higher share of the market as advertising recovers. LendingTree (TREE) detracted from performance based on fears of a severe drop in financing activity during a recession. ARK believes that government stimulus will cushion the blow of any recession. Indeed, in recent weeks, refinancing requests have increased significantly on a year over year basis in San Francisco and Raleigh, NC, respectively, thanks to the collapse in interest rates.
The ARK Genomic Revolution ETF (ARKG) outperformed the broad-based market indexes during the quarter, primarily because of Inovio Pharmaceuticals (INO). The company announced that the Coalition for Epidemic Preparedness Innovations (CEPI) granted it $9 million to begin work on a vaccine to prevent infection from COVID-19. According to the company, INO-4800, which entered human trials on April 6, should be available in significant quantities before year-end. Inovio’s proprietary dMAb platform also could enable novel immunotherapies to fight cancer and infectious diseases. Teladoc (TDOC) also contributed to performance for reasons noted above. Among the top detractors was CRISPR Therapeutics (CRSP) as investors took profits after the stock had rallied on preliminary data suggesting that its CRISPR-Cas9 gene editing therapy had cured a patient with sickle cell disease. The company’s stock also appeared to react adversely to a SEC filing disclosing that COVID-19 had forced delays in or suspensions of many of its clinical trials. Cellectis (CLLS), a leading allogeneic CAR-T company with intellectual property (IP) in TALENs-based gene-editing, also detracted in, what we believe, response to expected delays in clinical trials, particularly those focused on CAR-T cell programs for immuno-compromised oncology patients at heightened risk of the COVID-19 infection.
The ARK Fintech Innovation ETF (ARKF) outperformed the broad-based market indexes during the quarter. Among the top contributors were Shopify (SHOP) and Amazon (AMZN). Amazon and Shopify should be prime beneficiaries as consumption shifts online at an accelerated rate in response to quarantines and the closure of bricks-and-mortar stores around the globe. In addition, Amazon started licensing its cashier-free technology to retailers as authorities urged consumers and businesses to go cashless and prevent the spread of COVID-19. Among the top detractors were LendingTree (TREE), for reasons noted above, and Square (SQ). Square traded down based on fears that the government’s response to COVID-19 would hurt small businesses disproportionately. Management cut first quarter guidance, pulled full year guidance and, to support its merchant base, launched several products and services, including curbside pickup and a gift card platform. To assist consumers, Square used social media to “distribute” funds on a first come, first serve basis, resulting in its most successful customer acquisition week on record.
With some of the highest conviction names from the Funds discussed above, The ARK Innovation ETF (ARKK) outperformed the broad-based indexes during the quarter. Among the top contributors were Tesla and Teladoc for reasons noted above. Detracting from performance were CRISPR Therapeutics and LendingTree for reasons noted above.
ARK’s self-indexed ETFs, The 3D Printing ETF (PRNT) and the ARK Israel Innovation Technology ETF (IZRL), underperformed both broad-based equity indexes and their benchmark indexes. SLM Solutions (SLM) was the largest detractor in PRNT. At the end of March, SLM announced that it would raise 60 million euros in convertible bonds backed by Elliott ECAL.UL, its largest shareholder. Materialise (MTLS) was the largest contributor to performance for reasons noted above.
IZRL’s largest detractor from performance was Fattal Holdings (FTAL.TA). In response to the highly contagious COVID-19, Fattal suspended its hotel business and put thousands of its employees on unpaid leave. The company intends to close 50 of its 180 hotels in Israel and Europe and is considering the sale of 50%+ of its hotels. The largest contributor was BATM Advanced Communications (BVC.TA), a leading provider of real-time technologies for networking solutions and medical laboratory systems. In March, BATM announced a collaboration with Novamed Ltd for the joint development and marketing of a rapid testing kit to diagnose COVID-19.
ARK Innovation ETF
ARK Genomic Revolution ETF
The 3D Printing ETF
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