Cathie Wood’s ARKK Is Up. Do Investors Care?

The ARK Innovation ETF has attracted just $35 million in assets this year.

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Reviewed by: Lisa Barr
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Edited by: Sean Allocca

ARK Investment Management founder Cathie Wood and her futuristic vision of disruptive technology have intrigued investors for almost a decade, keeping assets streaming into her funds even as performance faltered. With the resurgence of the flagship ARK Innovation ETF (ARKK) this year, investors have been uncharacteristically cautious. 

Just two years ago, ARKK was the most successful actively managed fund. With $28 billion in assets under management at the time, it was the best-performing and largest active fund on U.S. markets. But in just two years since its meteoric rise, the fund has shrunk to nearly a quarter of its size, holding just $7.4 billion.  

ARKK’s performance has similarly tumbled. In the trailing 12 months, the fund has plummeted over 32%, according to etf.com data.  

“She's a master communicator, especially about this vision of a certain future, and I think she taps into people's FOMO [fear of missing out] on that,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. “They don't want to miss out just in case she's right.”  

Wood and her team, who collectively have more followers on platforms like Twitter than BlackRock Inc., Vanguard Group Inc. and State Street Corp. combined, have been uniquely positioned to leverage social media to broadcast their offerings.  

“[Traditional asset managers] weren't quite able to communicate, and be viral, and in the moment,” Balchunas said. “[Cathie and her team’s] use of Twitter and social media and crowdsourcing her research, is also something those firms didn't do.” 

Wood, who founded ARK in 2014, has had a storied history in investment management, working at firms like Capital Group, Jennison Associates and even co-founding hedge fund Tupelo Capital Management in 1998. ARK’s creation followed Wood’s 12-year tenure at Alliance Bernstein, which she eventually departed, as her idea of active ETFs focused on disruptive innovation were deemed too risky by the asset manager.  

Muted Interest

But as ARKK outperforms benchmarks, jumping almost 25% year to date, investor interest has been muted. The fund has just $35 million in inflows over the same period, according to etf.com data, and analysts have pointed to lackluster stock selection and limited portfolio vetting as an issue.  

"We at Morningstar haven't seen many signs that the investment team at Ark can successfully find the winners among competitors in those spaces,” said Morningstar strategist Robby Greengold. “The team just seems to have little ability to understand the risks that they're taking and to manage them with competence."   

With such a “high risk strategy with high return potential,” Greengold said the strategy “lacks … competence to identify the winners within the investable universe and also manage the risk appropriately.” 

Morningstar currently gives ARK Innovation a negative rating. 

A potential downturn in tech stocks and a projected recession in the second half of the year could also send ARKK lower given its holdings, according to Todd Sohn, senior ETF strategist at Strategas Research Partners.  

“The stocks benefited from quantitative easing and 0% interest rates, and particularly during the post-COVID period. Now that the Fed has raised 500 basis points in basically a year, those names are no-touch names,” he said, referring to ARKK’s underlying holdings.  

“You also have signs out there that things may get a little bit more difficult and financial conditions are still a little bit too tight,” Sohn added, mentioning “the recession on the horizon.” “That doesn't exactly spell an environment that I think you want to be in—growth and nonprofitable tech necessarily.” 

Appealing Ethos

To be sure, ARKK’s ethos of investing in more speculative and relatively more volatile technology stocks is certainly appealing.  

“These are very transformational technologies that are going to have to create our view to trillions of dollars of business value and wealth creation over the next five to 10 years,” said Ren Leggi, client portfolio manager at ARK. 

“We're investing in these key enablers, key beneficiaries of the technology innovation platforms. So naturally, we're taking a longer-term horizon,” he noted. 

Leggi added that the fund is “willing to take on more volatility” and could serve as either a core or satellite position in an investor’s portfolio.  

Meanwhile, others have emphasized the risk that funds like ARKK hold, akin to those seen in leveraged ETFs.  

“I think because [ARKK is] a growth-style equity fund, people feel comfortable using it as a significant portion of their equity allocation,” said Elisabeth Kashner, director of ETF research and analytics at FactSet, noting the importance for investors to do their research before allocating assets to investment vehicles.  

“They may not understand how risky it is in comparison with other growth funds or with broad market funds,” she added.  

 

Contact Shubham Saharanat[email protected]    

Shubham Saharan is a markets reporter at etf.com. Before joining the company, she reported for Bloomberg and the Financial Times. Saharan is a graduate of Barnard College of Columbia University.