Cathie Wood’s ARK Innovation Has Had a Bad Year. Why It Could Get Even Worse.

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Investors in

ARK Innovation ETF,
Cathie Wood’s flagship exchange-traded fund, should be used to bad news. The once high-flying ETF was among 2021’s worst performers and has lost another 30% of its market value so far this year. 

But the pile of bad news is getting bigger. Morningstar investment research downgraded the ETF to Negative from Neutral on Thursday, citing key issues related to investment firm ARK’s risk management strategy.

It’s a stark fall from grace.

In its first four years of existence, the ARK Innovation ETF (ticker: ARKK) had one truly standout year—in 2017—but otherwise its performance was not wholly divorced from that of the wider market and the

S&P 500
index.

It all changed in 2020, when the returns were astounding: 150% for ARK Innovation, compared with a 16% gain for the S&P 500. That success catapulted Cathie Wood’s reputation into the financial mainstream, giving her the kind of status that brings profiles by Time and comparisons to Warren Buffett.

For that, investors could largely thank massive bets on the type of high-growth stocks—like Tesla (TSLA)—that boomed in the rebound from the depths of the Covid-19 pandemic selloff. That’s as good as it got.

While last year was tremendous for the stock market, with the S&P 500 marching 27% higher, the same can’t be said for ARK Innovation. Wood’s leading ETF lost 24% in 2021, ranking it 1,471st out of a peer group of 1,503 actively-managed equity ETFs in the U.S., by Barron’s calculations.

According to analyst Robby Greengold of Morningstar, there are few reasons to believe a turnaround is coming. The fund “shows few signs of improving its risk management or ability to successfully navigate the challenging territory it explores,” he said.

Greengold outlines how Wood has “doubled down on her perilous approach” in hopes of a repetition of 2020’s performance. He said the fund has increased its risk by cutting its holdings to 35 from 60 less than a year ago, amplifying stock-specific risk, as it grows its exposure to companies in which it is a major shareholder.

“The strategy has effectively become less liquid and more vulnerable to severe losses,” Greengold said. “Wood’s reliance on her instincts to construct the portfolio is a liability.”

Moreover, Morningstar sees critical problems in the risk management plans at ARK Investment Management, which runs ARK Innovation and a number of other ETFs that bet on high-growth sectors such as biotech, robotics, and space exploration.

The group has no risk-management personnel, Greengold said, as well as a poor succession plan for Wood, who is 66 years old and the firm’s majority owner as well as lone portfolio manager. 

Morningstar said that Brett Winton, ARK’s director of research, would succeed her if needed, but that his decade-plus of industry experience includes none as a fund manager. In addition, many of ARK’s analysts have come and gone, Greengold said, and most of those that remain “lack deep industry experience.”

“ARK could do more to avert severe drawdowns of wealth, and its carelessness on the topic has hurt many investors of late,” Greengold said. “It could hurt more in the future.”

ARK Investment Management did not immediately respond to a request from Barron’s seeking comment on Morningstar’s report.

Write to Jack Denton at [email protected]