Cathie Wood pointed out one silver lining in her exchange-traded funds’ terrible run last year: the billions of dollars in losses will help offset future tax obligations on gains.
ARK Investment Management’s founder and CEO told Bloomberg TV on Tuesday that she has over $2 billion in losses from selling stocks during the market crash. By selling stocks at a loss, Wood’s funds can now reduce and potentially offset the tax payment on future capital gains.
“It’s over $2 billion right now against which we can take future gains and then concentrate towards our highest-conviction names,” Wood said.
Wood noted that as her flagship fund’s holdings declined from their peak in February 2021, they went from more than 50 to just 28 stocks. Selling stocks at a loss to offset a portfolio gain is a popular strategy used by investors to mitigate the impact of a market collapse.
Because of how they function with a market maker to execute in-kind redemptions, ETFs are already normally more tax-efficient than mutual funds.
According to Morningstar data, total assets across Ark’s nine ETFs have fallen to $11.4 billion from a high of $60.3 billion in February of last year. This was driven by severe drops in its flagship Ark Disruptive Innovation ETF, known as ARKK, which has lost over two-thirds of its value this year and is on course to have its worst yearly performance.
Wood’s ARKK was deemed the “worst-performing fund” in Q1 2022 by Morningstar.
“She’s done”
Despite her portfolios’ 2023 gains, investors aren’t eager to pile into Wood’s funds just yet. Apart from two ARK ETFs, all have outperformed the S&P 500 so far this year, but all have suffered net outflows in 2023, with ARKK losing $47 million through March 20.
Observers are seeing Wood’s recent tax relief spin as a desperate attempt to build confidence into her portfolio.
“Take out [Tesla] from her gains and her ARKK would likely be the worst fund out there. She’s done. She had her spotlight and it has faded since,” Twitter user @squawksquare posted.
Aside from seeing the positive side on offsetting capital gains tax in the future, Wood is pinning the hit on the valuation of her portfolio invested in what she calls disruptive technology on the Federal Reserve’s rapid interest rate hikes.
“The valuation hit … has been so severe to our strategy… and that was all related to the Fed jacking up interest rates nineteenfold in less than a year. Unprecedented,” Wood said Tuesday on CNBC’s Squawk on the Street.
The Federal Reserve boosted its federal funds target range to 4.5%-4.75% beginning in March 2022, the highest since October 2007. According to market expectations, the Fed will likely approve another quarter-point rate hike on Wednesday.
According to the widely followed investor, economically sensitive stocks, which have fared better in the face of rising rates, will soon experience the pain of an economic slowdown and likely US recession.
“It’s like an earthquake, not just for our strategy, actually. We now think the earthquake is rolling off of our strategy and into other strategies and those that are cyclical,” Wood said.
Wood is known for her bullish calls for the industries her portfolio has invested in. Some of them include calling for Tesla to hit $1,500 in the next five years, a surplus in lithium supply given the increase in demand, a $1 million price tag for bitcoin, and for the so-called disruptive innovation industry to be bigger than the current global GDP.
Information for this briefing was found via Bloomberg, CNBC, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
