https://www.wsj.com/articles/cathie-wood-ark-innovation-performance-11642175833?mod=tech_lead_pos12 THE INTELLIGENT INVESTOR How a Flood of Money Swamped Cathie Wood’s ARK The ARK Innovation ETF posted big returns, and big money followed. Now it’s the latest example of what happens when a fund becomes too large for its own good. So far this year, ARK Innovation, the largest of Cathie Wood’s exchange-traded funds, is down more than 15%. BRENDAN MCDERMID/REUTERS Fund manager Cathie Wood became a superstar in 2020, after her ARK exchange-traded funds earned some of the highest returns in history. So far this year, ARK Innovation, the largest of Ms. Wood’s ETFs, is down more than 15%. Over the past 12 months, it has underperformed Invesco QQQ Trust, which tracks the technology-dominated Nasdaq-100 index, by a startling 65 percentage points. What’s happened at ARK is a counterblast to the belief that ETFs are superior in every way to mutual funds. Over the past decade, investors have been stampeding into ETFs—which are, on average, much cheaper and more tax-efficient than mutual funds. ETFs have one critical flaw, however: They can get too big too fast, and nobody can stop it. Nearly all professional investors admit—at least in private—that success carries the seeds of its own destruction. It’s a lot easier to rack up giant gains with a small fund than with a big one. A mutual fund can mitigate this problem by closing to new investors, shutting off the inflow of cash. Over the years, when hot new money threatened to bloat mutual funds to unwieldy size, such firms as Fidelity, T. Rowe Price and Vanguard closed some of them until markets cooled off. That way, managers weren’t forced to buy stocks they wouldn’t ordinarily touch—and investors didn’t pile in right before performance tanked. In my opinion, not nearly enough mutual funds have closed to new investors—but at least they could. Unlike mutual funds, however, ETFs generally don’t close to new investors. The ability to issue shares continuously is what keeps the price of an ETF trading in line with the value of its holdings. So ETFs almost never limit their own growth. That presents a paradox: The better a portfolio performs, the bigger it will get—and the more likely it is to end up doing worse. That isn’t true for market-tracking index funds, but it is for just about any fund that seeks to beat the market. SHARE YOUR THOUGHTS Have you invested in the ARK funds? Why or why not? Join the conversation below. Seldom has anyone evaded that iron law of investment management—not even Warren Buffett himself. When Berkshire Hathaway was small, “we needed only good ideas, but now we need good big ideas,” Mr. Buffett wrote in early 1996. “Unfortunately, the difficulty of finding these grows in direct proportion to our financial success, a problem that increasingly erodes our strengths.” Since writing those words, Mr. Buffett has beaten the S&P 500 by an average of roughly half a percentage point annualized—far from the towering gains he racked up when Berkshire was much smaller. What about ARK? The firm grew so big so fast that it quickly ended up owning large percentages of many of its holdings. That could limit its ability to trade them without adversely affecting the price, says Corey Hoffstein, chief investment officer at Newfound Research, an asset-management firm in Wellesley, Mass. When a fund has to trade large blocks of stock, that can inflate their prices when the fund buys and crush their prices when it sells. Those moves can hurt returns. “You can end up with a strategy and structure mismatch,” says Mr. Hoffstein. “The ETF might have been a perfectly fine structure when ARK was smaller, but there comes a point when the structure can become a drag on the strategy.” Ms. Wood has also argued that the stocks of ARK’s innovative companies have fallen so far that they constitute “deep value” bargains that could deliver average returns of 30% to 40% annualized over the next five years. Be that as it may, the inability of ETFs to keep out hot money causes a problem no one can dispute: bloodcurdling losses for investors. Here’s how that happens. In its first two full years, 2015 and 2016, ARK Innovation gained less than 2% cumulatively. Then it took off, rising 87% in 2017, 4% in 2018, 36% in 2019 and 157% in 2020. Yet, at the end of 2016, the fund had only $12 million in assets—so its titanic 87% gain in 2017 was earned by a tiny number of investors. By the end of 2018 ARK Innovation had only $1.1 billion in assets; a year later it still had just $1.9 billion. Only in 2020 did investors begin buying big-time. The fund’s assets tripled to $6 billion between March and July 2020. From September 2020 through March 2021, estimates Morningstar, investors deluged ARK Innovation with $13 billion in new money. Right on cue, performance peaked. ARK Innovation ended up losing 23% in 2021—even as the Nasdaq-100 index gained more than 27%. Not many investors captured the fund’s biggest gains. An immense crowd of newcomers suffered its worst losses. As a result, estimates Simon Lack of SL Advisors, an asset manager in Westfield, N.J., ARK Innovation’s investors as a whole have lost money since it launched in 2014—even though the fund gained an average of more than 31% annualized over the past five years. In what Mr. Lack calls “an unfortunate downside of human behavior,” no matter how desperately you chase past performance, you will never catch it. You can only buy future performance—which is likely to be hindered by a tidal wave of new money. ETFs are powerless to deter this tragic cycle. Maybe mutual funds don’t belong on the ash-heap of financial history, after all. Write to Jason Zweig at intelligentinvestor@wsj.com
The entire operation of ARK has a lot of problems. It is never a professional money management. Its past performance is only an one time thing. The portfolio manager is a gambler, not a pro money manager. We've seen people like Cathie Wood so many times. Nothing surprising. She is no difference from those MEME trader or those tech stock traders. She will burn when time comes. As to ETFs, they have a lot of advantage over traditional mutual funds. It is the market liquidity. No one wants to pay a redemption fee if we want to sell our shares when the market is against us. That is just totally wrong. ARK does not speak for ETF. It is really nothing.
This is an interesting article. I have to admit that I am commenting before I have even finished reading the article. The problem of how a large influx of new cash can create difficulties for an ETF is very interesting. But I am trying to figure out whether this sort of thing could potentially happen to any ETF, or whether it is generally only a potential problem for actively managed ETFs, which are relatively new... BMK
Any ETF, actively managed, passively managed, not managed, managed by Ronald McDonald, it does not matter, it could happen. But, for I would guess 99% plus of them it will never happen though, as it would have to significantly outperform the market for a significant period for soooo many people to jump in and cause too much $$$ for the ETF to effectively deploy without taking hits from needing such huge blocks moved.
Can someone explain why the article seems to claim that mutual funds are somehow more relevant because ARK dropped a bunch lately? Those seem unrelated to me.
The author of the article is arguing that mutual funds can close and refuse to take money from new investors. ETFs cannot do this. And the author thinks that closing a fund can prevent losses like those that occurred in ARK.
Uh you're right, a case of failed skimming through on my part. Although I think ARKK would have been tanking now in the current market regime anyway had it been able to close earlier, if somewhat less. I read numerous articles toward the end of 2020 warning about ARKK driving returns in their thin liquidity tech holdings due to the ETF's popularity.
It's clear that ETFs such as ARKK are driving certain market certain types of market inefficiencies - accelerating the inflow of hot money on the boom side, and thus leading to larger busts. Those who had the balls to bet against ARKK's profitless tech/shitco holdings last year are cashing in big... if they were able to hold on.
Everyone lost their mind on that cathy biatch.another example of collective inanity. jsut give her 666 billion USD and watch she burns 66.6% of it