Cathie Wood's Innovation ETF draws $1 billion despite a 60% loss. Here's why investors are standing by her

Published Fri, Nov 11 202210:54 AM ESTUpdated Fri, Nov 11 20223:56 PM EST

A dismal 2022 for Ark Invest hasn't caused clients to yank out their money. Rather, Cathie Wood's loyal investors have been doubling down on her disruptive strategy this year. Wood's flagship Ark Innovation ETF (ARKK) has reeled in $1.3 billion in new money year to date despite a 60% loss, and that is among the top 3% of all exchange-traded funds in the U.S., according to FactSet. ARKK, with $6.9 billion assets under management, is more widely held by retail investors and smaller institutions, who tend to allocate a very small slice of their portfolio to disruptive technology. Because of the slight weighting, they could afford to be more loyal and patient despite the drastic drawdown. Others are using this year's sell-off to add to their holding. "We believe this ETF is more widely held within the wealth management channel ... primarily financial advisors that are building a broadly diversified portfolio," said Todd Rosenbluth, head of research at VettaFi "Some of them have dedicated a small slice to active disruptive innovation and ARKK has gotten a majority of the interest." The Innovation fund is focused on advanced technology companies in areas such as genomics, robotics, internet and fintech. Wood's top holdings, such as Zoom Video , Roku and Teladoc , enjoyed explosive growth during the pandemic, but they turned out to be some of the biggest losers this year. Wood, however, remains unfazed by the big downturn. She has been buying the dip in her favorite growth names all year, and so have many of her investors. "If you decided you wanted to have a 2% to 5% weighting in your portfolio towards the fund, that position has shrunk this year but people are adding back in to it with conviction," Rosenbluth said. The ETF staged a dramatic relief rally Thursday on the back of a cooler inflation reading . It jumped more than 14%, posting its biggest one-day advance since its inception in 2014. Wood has been calling for deflation for some time, betting that high prices that emerged starting in 2021 were caused by temporary Covid-related supply issues. Wood said recently that her conviction in deflation has increased, and the latest consumer price index report could signal that the trend has started to go in her direction. Big liquidity Not only does the ETF attract long-term growth investors, the fund is also appealing to short-term momentum traders who use it as a proxy for disruptive technology investing because of its massive liquidity, analysts said. "It's a highly volatile, high beta. It has a dual purpose," said Chris Murphy, Susquehanna co-head of derivative strategy. "It's being used for near-term high-beta momentum type of investors, and it's also used for long-term 'set it and forget it' investors who want to have exposure to the most unique technology stocks out there and leave it. The volumes are benefiting from both." ARKK trades nearly 25 million shares a day on average, about a quarter of the monster SPDR S & P 500 ETF's volume, according to FactSet. The fund is also among the top 15 ETFs with the most options activity, according to Murphy. Meanwhile, ARKK has a high beta, meaning it's more volatile than the broader market. When the rest of the market goes up, the fund goes up more, and vice versa. Unlike the S & P 500 and the Nasdaq Composite , which have a high concentration in megacap stocks like Apple and Microsoft , ARKK, with only 32 holdings, doesn't own any of those tech giants. Wood's visibility Wood, the sole manager of ARKK, has risen to prominence on Wall Street not just because of the stunning roundtrip of her fund, but also due to how consistent and vocal she has been about her strategy. "There are a ton of ETFs out there, but this one does have a clear following," Murphy said. "She is consistent. She sticks to her guns." Wood is known for her bold calls on Tesla and bitcoin. Her updated call on Tesla predicted the stock will hit $4,600 by 2026 (or $1,533, adjusted for this year's 3-for-1 split). Shares of Tesla are down 46% this year, trading around $189 apiece. The 66-year-old University of Southern California grad called for the price of bitcoin to surge to $500,000 in the next five years if companies continue to diversify their cash management and institutional investors continue to allocate 5% of their portfolio to the space. The cryptocurrency was trading below $17,000 Friday. Wood also maintains a transparent relationship with her clients, sharing daily trades and holding regular investor calls to inform clients of her moves and outlook. "Ark has done a great job of pro