How Investors Hurt Themselves with Cathie Wood’s ARK Funds
They built shrines for Cathie Wood. At least, that’s what it looked like on investment forums late in 2020. The fund manager had an evangelical following after embracing a strategy that wrecked so many dot-com investors twenty years ago - she filled all five of her ARK innovation funds with companies that had yet to earn an annual business profit.
But like the soaring dot-com stocks of the late 1990s, that didn’t stop her funds from producing eye-popping gains. ARKs Next Generation Internet ETF (ARKW) gained 157.46 percent last year. ARK’s Fintech Innovation ETF (ARKF) soared 152.82 percent. The firm’s Genomic Revolution ETF (ARKG) ballooned 180.56 percent. The ARK Innovation ETF (ARKK) gained 152.52 percent and the firm’s Autonomous Technology & Robotics ETF (ARKQ) rose 107.22 percent. For the first few months of 2021, each fund continued to earn double-digit gains.
Money flooded into these funds at the start of 2021.
When people seek investments, they typically buy funds with the best recent performance. That’s human nature. But if you want to maximize your long-term wealth, that’s a bad idea. That’s based on something called, “reversion to the mean.” In a nutshell, it means funds that perform well over one period rarely continue their winning ways. As I explained in this story, even most financial advisors don’t understand the term. When they earn their CFPs (Certified Financial Planning certification) reversion to the mean isn’t part of their curriculum.
Most financial advisors, just like most individual investors, chase past performance. That’s why, according to research published in The Journal of Finance, most financial advisors underperform equal risk-adjusted portfolios of index funds by about 3 percent per year. They don’t just do that with their clients’ money. They also do that with their own.
They buy funds with strong recent track records. But as the SPIVA Persistence Scorecard shows, most funds that outperform during one designated time period typically underperform the next. Most of the people who bought ARK ETFs didn’t know that, either. They did well for a while, and then they began to sink.
Most of them bought high after the funds had a great run. And then the funds fell. The Wall Street Journal, referencing analysis from Bespoke Investment Group, says the average investor in Cathie Wood’s five funds only earned about 5.24 percent per year from the funds’ inception dates to Monday, May 10, 2021. That’s crazy stuff. After all, Cathie Wood’s first four funds earned compound annual returns of 39.77 percent (ARKW); 25.87 percent (ARKG); 33.97 percent (ARKK) and 25.87 percent (ARKQ) since they were launched on September 30, 2014. Her fifth fund (ARKF) averaged a compound annual return of 55.28 percent since its inception on February 4, 2019 (These were the posted annual returns published on the ARK Invest website on May 14, 2021).
All of Cathie Wood’s ARK funds have stumbled hard since May. That’s why I suspect the average investor in her funds hasn’t beaten inflation since her funds’ 2014 inception date. That, however, isn’t Cathie Wood’s fault. The fault is with human nature. We chase past returns. We like to buy high. We tell ourselves stories explaining why such investments will keep going up. And we hang on every word of those who rationalize our hopes.
These days, few people on Internet chat groups talk about Cathie Wood. The evangelical chorus has somehow disappeared. Since February, the best ARK fund of 2020, the ARK Genomic Revolution ETF is down a gut-wrenching 37.88 percent to December 8, 2021. None of her other funds have earned a profit since February either. In sharp contrast, the S&P 500 is up about 26 percent over the same period.
If the people who bought ARK funds late last year believed Cathie Wood could pick the best stocks, they would be pouring money into those funds today. After all, those funds are cheaper now than they were 12 months ago. But many of those investors have given up for now.
For my part, I won’t buy these funds regardless of how far they might sink.
That doesn’t mean they won’t soar again. They might. And if they do, people will fall over themselves again to pay the higher price. The odds of long-term success, however, are better with a diversified portfolio of low-cost index funds. We just have to remember to remain globally diversified, maintain a consistent allocation, keep adding money if we have it, and never chase our tails.
When Champions Fall From Grace
Performance of ARK Funds versus S&P 500
February 2020 – December 8, 2021
|Fund||Performance||$10,000 grew/dropped to…|
ARK Next Generation Internet ETF (ARKW)
ARK Fintech Innovation ETF (ARKF)
ARK Genomic Revolution ETF (ARKG)
ARK Innovation ETF (ARKK)
ARK Autonomous Technology & Robotics ETF (ARKQ)
Vanguard S&P 500 Index
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.