When has Cathie Wood ever followed the status quo? Her aggressive growth investing strategies have brought Ark Invest funds to the map, and that isn't about to change. Wood is dropping most of her holdings of Chinese tech stocks in one fell swoop, and investors might want to hold onto their seats.
Here's what this means for Ark funds, and why it could cause a recalibration of assets as the funds get used to their new weightings.
Chinese regulators are cracking down on big tech
Recently, Chinese ride-sharing company DiDi (NYSE:DIDI) went public in the U.S. Shortly after, China banned the use of the app, which sent the company's fledgling stock tumbling by a third.
Also, Ant Group, a Jack Ma corporation, was forced to postpone its IPO until the company regrouped its operations to appease domestic regulators.
These moves and more sent a direct signal to other tech companies in China, especially in regards to data privacy and antitrust concerns. For U.S. investors, felled futures are evidence of increasing risk aversion.
Cathie Wood is responding to uncertainty in the Chinese tech stock space.
Wood's active ETFs from Ark Invest (the firm currently offers six active funds) have whittled away their Chinese holdings to a minimal amount. In February, the flagship fund Ark Innovation ETF (ARKK) held at least eight percent of Chinese stocks, but Wood has slimmed that number to less than 1 percent.
Wood has also trimmed the Ark Next Generation Internet ETF (ARKW) to hold 5.4 percent of Chinese stocks, which is its lowest weighting ever.
One stock in particular, Tencent (OTC:TCEHY), is down to a 0.5 percent holding in ARKK and a 0.8 percent holding in ARKW.
While Wood hasn't decided to completely eliminate Chinese stock exposure, she has made the decision to actively limit their presence in her funds. This could be a turning point for the funds, although a period of readjustment is imminent.
In an Ark Invest webinar, Wood told her audience, "From a valuation point of view, these stocks have come down and again from a valuation point of view, probably will remain down."
What this means for ARKK and other Cathie Wood funds
Wood warned of a "valuation reset," which suggests that there will be a period of time that Ark funds might need to readjust after the weighting shift.
However, most Ark funds have had a difficult time this year. While the Ark Autonomous Tech & Robotics ETF (ARKQ) is in the green YTD, ARKK is down 2.42 percent during the same period. ARKW is marginally up for the year so far after numerous downswings.
From a holistic perspective, this move is likely good news for Ark fund investors with a long time horizon, many of whom could use a foundation of stability that Chinese tech stocks can't currently provide due to external regulatory implications. All the while, many investors are ready for this shift in risk assessment for funds beyond the Ark Invest umbrella.