It has been just a few brutal months for growth-oriented know-how traders like myself. Many tech shares have loved astronomical good points over the previous yr regardless of — and in some instances, due to — the COVID-19 pandemic, so a pullback is not totally sudden. Nonetheless, drawdowns of this magnitude might be tough to expertise each financially and emotionally. There’s additionally been speak of rising rates of interest alongside latest issues about inflation which have contributed to souring investor sentiment.
For a lot of of those causes, I not too long ago shorted Cathie Wooden’s flagship ETF, Ark Innovation (NYSEMKT:ARKK). This is why.
Hedging in opposition to the sell-off
In some ways, Ark Innovation has grow to be the poster little one for speculative, high-growth tech stocks. As such, the actively managed ETF has been particularly weak to the latest pullback. As of Friday’s shut, Ark Innovation is roughly 35% off of its highs set in February.
The fund loved unimaginable outperformance in 2020 as a lot of its holdings put up blockbuster returns in the course of the pandemic on account of quite a lot of elements. Know-how firms had been instrumental in serving to individuals and companies adapt to a world the place a lethal virus pressured everybody to work remotely, and enterprise organizations needed to speed up digital transformations. On the identical time, there was hope for electric vehicle (EV) shares, as adoption is rising and the Biden administration is enacting supportive insurance policies.
To be clear, I am optimistic concerning the long-term prospects of a lot of Ark Innovation’s core holdings. In reality, I personal lots of the fund’s prime 10 holdings outright. Particularly, I maintain Tesla, Roku, Shopify, Spotify, and Twilio, and plan to proceed doing so.
The explanation why I am shorting Ark Innovation is to place a hedge in place for potential draw back safety if development shares proceed to dump. Whereas sustaining lengthy positions in lots of the identical holdings, shorting the ETF can probably generate good points to offset short-term declines within the particular person positions, thereby offering some protection for my total portfolio. I solely remorse that I did not put this hedging technique in place sooner.
I thought of various methods, resembling shopping for a bearish put unfold on the tech-heavy Nasdaq Composite (NASDAQINDEX:^IXIC), however hedging with choices might be extra unstable on account of all the elements (the Greeks) that influence choices pricing. Time decay (damaging theta) might be pricey, and in the end I decided that shorting Ark Innovation outright could be less expensive, even after factoring in borrowing charges. Moreover, Ark Innovation is extra concentrated within the particular shares which might be particularly weak proper now, whereas the Nasdaq Composite is extra diversified.
Tech’s long-term prospects stay sturdy
For what it is price, Wooden stays optimistic on the outlook for know-how shares. In a latest interview with CNBC, the expansion investor dismissed issues across the pullback. “From our perspective — five-year time horizon — nothing has modified besides the worth,” Wooden informed the outlet.
Ark Innovation continues to purchase tech shares, as proven by its every day commerce disclosures. If something, the pullback may lead to larger annual returns going ahead. On the February peak, Wooden mentioned that Ark was anticipating a compound annual development price (CAGR) of round 15%. As Ark continues to purchase the dip, the fund is now elevating its estimates to a CAGR of 25% to 30%.
Tech shares, as measured by the Nasdaq Composite, have an extended historic document of outperforming the opposite two main indexes. That features larger volatility at occasions, however affected person traders have little to be fearful about. Somewhat hedging within the brief time period may also assist easy out the swings.
This text represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in all our personal — helps us all suppose critically about investing and make selections that assist us grow to be smarter, happier, and richer.