Cathie Wood, the founder of investment management firm Ark Invest, is known for her aggressive bets on disruptive technologies.
Her flagship fund, the Ark Innovation ETF (ARKK), made headlines in 2020 when it netted a whopping 153 percent return for the year. But some dramatic losses have occurred since then, leading many investors and experts to question the fund’s long-term potential and Wood’s own stock-picking strategy.
So who is the woman behind this controversial exchange-traded fund (ETF)? In this article, we’ll explore Wood’s background, her investment style, and her successes and criticisms.
Who is Cathie Wood?
Cathie Wood grew up in California and attended the University of Southern California (USC). While at USC, she was mentored by renowned economist Arthur Laffer, known for his illustration of the Laffer curve, which shows the relationship between tax rates and the government’s tax revenue.
Wood spent decades honing her skills in the financial industry. Her journey began as an assistant economist for Capital Group and continued at Jennison Associates, where she served as chief economist.
Wood’s expertise grew during her time at AllianceBernstein, where she held a senior position. This transition from economics to portfolio management marked a turning point in her career. While at AllianceBernstein, Wood gained experience investing in high-growth, high-risk, smaller-cap stocks.
In 2014, Wood launched her own company, Ark Invest, with the goal of focusing on disruptive technology. Ark Invest manages six active ETFs, all connected to the tech sector, including its largest fund, the Ark Innovation ETF.
About the Ark Innovation ETF
Ark Invest’s flagship fund, the Ark Innovation ETF, debuted in 2014. This thematic ETF focuses on companies poised to benefit from technological advancements in areas like cryptocurrency, robotics, artificial intelligence and fintech.
This $5.8 billion fund has experienced volatile returns. It doubled in value in 2020, briefly becoming the largest active ETF on the market while generating significant returns for investors. However, the fund plummeted over the next two years.
Since inception, the fund’s annualized performance is much less impressive than its 2020 highs, averaging a 10.1 percent return per year.
Investors have endured significant losses along the way, including a 23 percent loss in 2021 and a 67 percent loss in 2022, due to declining value in holdings like Zoom, Roku and Roblox.
Despite a 68 percent gain in 2023, the Ark Innovation ETF is down about 9.5 percent year-to-date as of Oct. 16, 2024. The fund’s concentration in high-risk, high-reward stocks is a key factor contributing to its ongoing volatility.
Despite these risks, Wood remains optimistic about the long-term prospects of her investment targets.
As an actively managed ETF, the Ark Innovation ETF charges higher fees than passively managed index funds, which generally have lower fees because they don’t need to pay professionals to pick stocks. For example, ARKK charges an annual expense ratio of 0.75 percent, while many passively managed S&P 500 ETFs, such as the Vanguard S&P 500 Index ETF (VOO), charge expense ratios of 0.03 percent or less.
Top holdings of the Ark Innovation ETF
Here are the top holdings in the Ark Innovation ETF as of Sept. 30, 2024. The following five companies make up 44.3 percent of all fund holdings, according to the Ark Innovation ETF factsheet.
Tesla
- What the company does: Electric vehicle manufacturer
- 15.5 percent of holdings
- 1-year return: -12.73 percent
- 3-year return: -7.89 percent
- 5-year return: 66.44 percent
Roku
- What the company does: Streaming platform provider and device manufacturer
- 10.6 percent of holdings
- 1-year return: 19.46 percent
- 3-year return: -37.57 percent
- 5-year return: -9.89 percent
Coinbase
- What the company does: Cryptocurrency exchange
- 6.9 percent of holdings
- 1-year return: 167.38 percent
- 3-year return: -11.22 percent
- 5-year return: N/A
Roblox Corp
- What the company does: Online gaming platform provider
- 6.4 percent of holdings
- 1-year return: 33.60 percent
- 3-year return: -18.96 percent
- 5-year return: N/A
Block Inc
- What the company does: Payment processing (formerly known as Square)
- 4.9 percent of holdings
- 1-year return: 66.30 percent
- 3-year return: -33.94 percent
- 5-year return: 2.23 percent
Cathie Wood’s investing style
Wood is known for her aggressive, technology-focused investment strategy. While her transparency and enthusiasm have attracted a following, critics question the sustainability of her approach.
Here are some of the key trademarks of Wood’s investment style and strategy.
Disruptive technology: High-risk and volatile
Wood isn’t afraid to invest in companies that are considered risky or speculative. You typically won’t find consumer staples, dividend-paying companies or low-volatility stocks in Ark funds. Value stocks, a staple of Warren Buffett’s portfolio, are also absent. Wood believes the potential rewards of disruptive technologies outweigh the risks.
Whether it’s her bullish stance on Tesla or her conviction in cryptocurrencies, Wood is comfortable taking a contrarian view. This willingness to stomach volatility has made the Ark Innovation ETF popular among investors seeking high returns.
But the risk remains. Wood’s holdings are highly correlated, meaning they typically rise and fall together. This worked to investors’ advantage in 2020, for example, when technology stocks surged during the pandemic. But it can also lead to crushing losses.
Many ETFs are diversified across multiple sectors and industries. The Ark Innovation ETF, meanwhile, is thematic and almost exclusively composed of tech companies. Its top holdings are focused on electric vehicles, cryptocurrency exchanges, smart devices, video game development and fintech. Additionally, according to the Ark Innovation ETF factsheet, as of Sept. 30, 2024, 70 percent of the fund’s holdings are in either large-cap or mega-cap stocks — companies valued at $10 billion or more.
If — and when — the technology sector takes a tumble, the fund is more vulnerable and more likely to nosedive.
Still, Wood’s aggressive approach garnered a legion of followers on social media, particularly on Reddit, as the Ark Innovation ETF ascended in 2020. But her risky bets have also soured many investors who bought in near the top, then faced tremendous losses for two years straight.
Self-certainty driven by research and analysis
Wood is known for her unwavering confidence in her investment decisions. She backs her convictions with research and analysis, often relying on her own team of analysts to identify promising opportunities.
The Ark team conducts two-tiered research to identify investment opportunities. First, they analyze broad trends to find innovative companies and assess market size. The firm uses what it calls an open research strategy, which involves gathering information from various sources, including thought leaders, social media and crowdsourced data. Researchers then pinpoint businesses they believe are poised to benefit from technology disruptions.
Ark scores potential investments based on key metrics and a proprietary system. Then Wood, as CIO and portfolio manager, makes the final call on investment decisions.
Wood’s self-assurance has contributed to her success, but she has also drawn criticism from those who doubt the sustainability of her investment strategies.
Portfolio transparency
Unlike many investment managers, Wood is known for her transparency. She regularly shares her investment thesis and research on the companies she buys, and her firm produces a stream of content — including podcasts, white papers, YouTube videos and newsletters — that reach millions of followers.
This transparency contrasts with the typical Wall Street practice of quarterly disclosures and obscured investment strategies.
Ark Invest even had a fund focused on transparency at one point, The Ark Transparency ETF. However, it was shuttered just nine months after its December 2021 launch after the ETF’s underlying index, The Transparency Index, was discontinued by Transparency Global. The fund was designed to track 100 companies deemed “most transparent” in their disclosures to investors. This marked the first time the firm had terminated a fund.
Criticism of Cathie Wood
Wood’s investment strategy came under fire following the peak of the Ark Innovation ETF in February 2021. Critics have pointed to the significant losses suffered by the fund’s investors. Morningstar even labeled the Ark fund family a “value destroyer” in February 2024.
The main criticism lies in Wood’s narrow focus on innovative companies, often disregarding their financial performance or valuation. The Ark Innovation ETF’s portfolio includes many money-losing businesses, which were particularly vulnerable to rising interest rates introduced by the Federal Reserve beginning in 2022.
Among Ark Invest’s six active ETFs, only two have returned five-year annualized returns of 10 percent or more — the Ark Automotive Tech & Robotics ETF (ARKQ) and the Ark Next Generation Internet ETF (ARKW).
According to a Morningstar analysis, the Ark family of funds lost an estimated $14.3 billion in shareholder value over the decade spanning January 2014 to January 2024. This ranked Ark as the worst-performing fund family during that period, losing more than twice as much money as the next worst-performing funds.
Bottom line
Cathie Wood’s approach has made her a polarizing figure in finance. Her willingness to embrace risk and her unwavering belief in disruptive technologies have earned her both admiration and criticism. As the technology landscape evolves, Wood’s investing strategies will likely remain a subject of intense debate.
Read the full article here
