The rise and fall of the ARK Innovation ETF

The story of Cathie Wood’s ARK ETF’s began in 2014. As CIO at investment management company AllianceBernstein, she had a novel idea, which was to create a series of thematic ETFs that could be marketed to those interested in innovation and disruption.

She pitched the idea to her bosses at AllianceBernstein who rejected it, saying it was too risky. In response, she decided to go it alone and start her own company, ARK Investment Management, based in St Petersburg Florida.

In a short time, Cathie launched a series of ETFs, all based on various innovative themes. These included the ARK Genomic Revolution ETF, the ARK Autonomous Tech and Robotics ETF, and the ARK Next Generation Internet ETF.

Her most popular ETF, however, was the ARK Innovation ETF which at its height amassed over US$20bn in Assets Under Management.

The type of stocks that make up the ARK Innovation ETF include Tesla, Square, Shopify, Roku, Zoom, Coinbase Global Inc and Spotify.

Performance

The ARK Innovation ETF was launched in Oct 2014 at a price of around US$20. In its first five and a half years it achieved moderate gains rising to US$38 in March 2020, which was the time of the Covid crash.

After the Covid crash, however, the ETF really took off, rising over 300% to US$156 by Feb 2021.

As the ARK Innovation ETF held companies that focused on solving problems through innovation, it excelled through the Covid lockdowns. One of these problem-solving companies was Zoom, which boomed through the lockdown conditions. Tesla, Shopify and Roku also soared through this time.

With her unshakeable vision for innovation, Cathie became a cult hero. However, not everyone was convinced, as Michael Burry (of ‘Big Short’ fame) took a short position against the ETF.

In late 2021, with inflation and interest rates rising, non-profitable technology stocks were sold off, and this has continued through to today. The ARK Innovation ETF is currently selling for around US$35, which is 75% below its peak.

Surprisingly, despite the massive falls, for those investors who bought into the ETF in Oct 2014, they are still in the money, with returns slightly below that of the S&P 500. However, this is cold comfort for those who bought into the ETF near its peak.

Cathie’s Appeal

Cathie Wood is no ordinary individual. She is an excellent speaker with an extraordinary amount of confidence, and would appear regularly on the US business news and at business events.

Her passion was innovation, and believed that owning stocks that promoted innovation gave investors their best chance for growth.

Cathie’s total belief in herself and in innovative technologies is unwavering. However, it is so strong that she doesn’t see the possibility of other outcomes playing out. Her boss at AllianceBernstein said, ‘Cathie’s biggest blind spot is managing risk and volatility’.

Some have called Cathie Wood the anti-Warren Buffett. Risk management just isn’t part of her toolkit.

Cathie knows only one way when investing. She buys long, and if a stock falls, she buys more. This may be a fair approach under normal circumstances, but many of the stocks in her universe are speculative and hard to value. Hence, she has caught a lot of falling knives.

Admitting mistakes is also not really a part of her approach, nor is investing conservatively. Even after all the falls, today she is still buying Tesla and cryptocurrencies.

Elon Musk

Cathie is a great fan of Elon Musk, and in a recent interview when talking about Elon Musk (post the Twitter takeover), Cathie focused entirely on his innovation side.

However, what she didn’t talk about was the potential for brand destruction at Tesla, brought about by Musk’s shenanigans at Twitter. How a business treats their brand (and their employees and customers), would be top of the investment checklist for seasoned investors like Warren Buffett.

The Future

So, what lies ahead for Cathie Wood’s ARK Innovation Fund?

In short, it’s hard to know. The fund may rebound over time, or it may continue to decline especially given its large holdings in Tesla and cryptocurrencies.

One thing for sure is that Cathie Wood is strong in her beliefs, and hasn’t given up.

The story of the ARK Innovation ETF highlights the risks of speculative stocks, but also the risks associated with thematic ETFs. As there is no diversification across themes or sectors, if the theme falls, the whole ETF will suffer, just another reason why InvestSMART does not invest in any thematic ETF's. 

Interested in reading more on thematic ETFs? Try Phil's article Thematic ETFs - are they worth the punt?