During the second quarter, broad-based equity indexes – as measured by the S&P 500 and MSCI World – rebounded from the coronavirus crisis at a rate much more rapid than that after the global financial crisis in 2009. Because fiscal and monetary policy makers have responded with record-breaking measures to “flatten the curve” and slow the spread of COVID-19, fears of an extended global recession appears to have dissipated. That said, during June a resurgence of “hot spots” in China and the US boosted equity market volatility, as measured by the CBOE VIX. Meanwhile, the US Treasury yield curve steepened slightly, with the 10-year Treasury yield stabilizing in the 65 basis point (bp) range and the 90-day Treasury rate edging lower to 14bp.
Because the panic has peaked and most countries have “bent the curve”, curbing the spread of COVID-19, the equity market as measured by the MSCI World has recovered more than half of this year’s loss. In our view, the markets discounted a significant amount of bad news and overdid it in March. In turn, the stock rout highlighted the seriousness of COVID-19, not only galvanizing government policymakers 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. The resurgence of the virus hot spots in both China and the US has reinforced the importance of these precautionary measures. At the same time, the consumer saving rate in the US has continued at record breaking levels, 32% and 23% in April and May respectively, likely mirroring high rates in the rest of the world and suggesting that pent-up consumer demand will support the recovery now under way. Indeed, given the significant drawdown in US retail inventories in April and May, businesses seem to have been caught off guard and are scrambling to catch up.
Relative to the S&P 500 Index and the MSCI World Index, ARK’s five actively managed ETFs and two self-indexed ETFs outperformed during the second quarter.
To read a summary of ARK’s biggest contributors and detractors, please see below.
The ARK Autonomous Technology and Robotics ETF (ARKQ) outperformed broad-based market indexes. Among the top contributors to performance was Tesla (TSLA). Tesla’s first quarter deliveries surpassed analysts’ expectations before its Fremont factory shut down in response to the coronavirus crisis. After Fremont reopened in early May, analysts began to anticipate better than expected second quarter deliveries as well as the potential for a Terafactory for Cybertruck production in Austin, Texas. Tesla continues to gain share of the global electric vehicle market with 26% of sales year-to-date, up from 22.5% in 2019. 2U (TWOU) also contributed positively as analysts focused on the increase in demand for online education, and 2U’s robust position, in the midst of the COVID-19 crisis. 2U surpassed first quarter expectations on both, the top and bottom line, and announced an undergraduate program at Simmons University.
Among the bottom contributors were Virgin Galactic Holdings (SPCE) and Elbit Systems (ELST). Virgin Galactic surged on SpaceX’s success with its Crew Dragon launch and then fell on news that Richard Branson was selling shares to help fund his other companies. Virgin Galactic continued to make progress towards its goal of launching a human into space, completing its first glide flight from Spaceport America and signing a Space Act agreement with NASA. Under the agreement, Virgin Galactic will develop a new private orbital astronaut readiness program. Elbit Systems (ELST) missed expectations on revenue and earnings for its first quarter but announced not only a three-year $103 million contract for electronic warfare suites in Asia but also a two-year $53 million contract for intelligence suites in Southeast Asia.
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. Square (SQ) also contributed as investors began to grasp the potential of Cash App as a Digital Wallet. While Square’s seller ecosystem still is facing pressures from COVID-19 related commerce restrictions, Cash App seems to have gained market share, especially because of the important role it played in facilitating the government’s Payment Protection Plan (PPP).
Among the top detractors were LendingClub (LC) and Slack Technologies (WORK). LendingClub detracted from performance based on concerns about bad loans in an economically challenging environment. In response, the company cut ~30% of its workforce and reduced compensation for top management, increasing the odds that regulators will approve its acquisition of Radius Bank, in turn enabling it to build a Digital Wallet. In June, LendingClub announced the expansion of its LCX platform, aiming to increase transparency as registered institutional investors analyze, price, and bid on loans. LCX should increase LendingClub’s total addressable market and preserve its liquidity, as the loans will not be held on balance sheet. Slack Technologies detracted from performance after reporting a 50% increase in first quarter revenues, missing expectations that the COVID-19 crisis had elevated for this collaborative online messaging network. Importantly, Slack won Amazon Web Services (AWS) as a customer and launched ‘Connect’, offering cross-company collaboration opportunities.
The ARK Genomic Revolution ETF (ARKG) outperformed the broad-based market indexes, primarily because of Arcturus Therapeutics’ (ARCT) which reported pre-clinical data on its mRNA COVID-19 vaccine that showed preliminary efficacy. Invitae (NVTA) also contributed to performance after announcing the acquisition of ArcherDx, a promising combination in the molecular diagnostics sector. On a high level, the merger marks Invitae’s entrance into the somatic testing market—profiling cancerous tissue using next generation sequencing to surface mutations and match patients to precision therapies. The acquisition also expands the value proposition for its biopharma customers who will be able to design somatic assays in ArcherDx’s digital design studio. ArcherDx’s kit and software model offers high margin potential, enabling Invitae to power clinical outcome studies and integrating it more deeply into the oncology treatment ecosystem.
Among the top detractors were Iovance Biotherapeutics (IOVA) and Cellular Biomedicine (CBMG). Iovance Biotherapeutics reacted not only to the sudden departure of its CFO but also to Seattle Genetics’ positive data in cervical cancer, an indication that Iovance also is targeting. Iovance’s therapy involving tumor infiltrating lymphocytes (TILs) had a response rate nearly double that of Seattle Genetics, which could mean faster approval. Cellular Biomedicine detracted from performance in response to the coronavirus-related slowdown in clinical trial and research.
The ARK Fintech Innovation ETF (ARKF) outperformed the broad-based market indexes during the quarter. Among the top contributors were Square (SQ), for reasons noted above, and Mercadolibre (MELI). MercadoLibre contributed to performance as investors noted the impact that COVID-19 has had on the adoption of e-commerce and digital payments in Latin America. It also announced its third fulfillment center in Brazil, scheduled for July 2020, as it continues to enhance its position as the leading e-commerce platform in Latin America.
Among the top detractors were LendingClub, for reasons noted above, and Wirecard AG. Wirecard traded down after the company announced that its auditor, Ernst & Young, was unable to obtain sufficient evidence of the cash balances associated with $2.1 billion in Asian trust accounts. ARK disgorged its position immediately upon learning that Wirecard either had perpetrated accounting fraud or had been its victim.
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 Invitae, for reasons noted above. Detracting from performance were LendingClub and Iovance Biotherapeutics, for reasons noted above.
The ARK index ETFs, The 3D Printing ETF (PRNT) and the ARK Israel Innovation Technology ETF (IZRL), outperformed the broad-based equity indexes but underperformed their more specialized benchmark indexes. Proto Labs (PRLB) was the largest contributor in PRNT, beating analyst expectations for revenue and earnings in its first fiscal quarter based on its rapid manufacturing service during the coronavirus pandemic during which time it has shipped 4 million parts with COVID-19 applications. 3D Systems (DDD) was the largest detractor from performance as the pandemic impacted printer sales to its dental and jewelry customers significantly. In May, 3D Systems announced Jeffrey Graves, formerly CEO of MTS Systems, as its new CEO.
IZRL’s top contributor to performance was Compugen (CGEN) thanks to the success of its TIGIT and PVRIG programs. The FDA cleared an IND application for a Phase 1/2 study evaluating COM701, an anti-PVRIG antibody, in combination with Opdivo, a check point inhibitor, and Bristol Myers Squibb’s investigational anti-TIGIT antibody in patients with advanced solid tumors. The largest detractor was Bet Shemesh Engines Holdings (BSEN), as airline travel plummeted in the face of the COVID-19 crisis.
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