Invest Like Cathie Wood: Picking The Right Ark Etfs

Cathie Wood is a fund manager who has attracted a large group of loyal investors who watch her every move. Her firm Ark has a range of active ETFs, with its flagship Ark Innovation ETF (ARKK) being a shining light, returning 20% in 2020 and 149% in 2021. Wood has been given the nickname 'Money Tree' by South Korean investors. In this article, we will discuss how to invest in Cathie Wood's ETF.

Weigh up the risks and rewards

Weighing up the risks and rewards is an essential step before investing in Cathie Wood's ARK ETFs. While Wood's investment approach has yielded substantial returns, it is also associated with significant risks. Here are some key considerations:

Risk of Volatility

Cathie Wood's investment strategy embraces volatility. She actively seeks out disruptive technologies and innovative companies, which tend to be high-risk and volatile. This means that while there is potential for high returns, there is also a significant risk of loss. Wood's holdings are highly correlated, meaning they typically rise and fall together. This worked in favour of investors in 2020 when technology stocks surged during the pandemic, but it can also lead to substantial losses when the tech sector declines.

Concentration in High-Risk, High-Reward Stocks

The ARK Innovation ETF, Wood's flagship fund, has experienced volatile returns. It doubled in value in 2020, but then plummeted over the next two years. The fund's concentration in high-risk, high-reward stocks is a key factor in its ongoing volatility. This concentration in risky stocks has led some experts to question the wisdom of Wood's strategy.

Unpopular Investment Choices

Wood is unafraid to adopt contrarian positions and invest in companies that are currently unpopular in the broader market. While this approach can lead to substantial rewards if her investments prove successful, it also entails significant risk.

Long-Term Investment Horizon

Wood advocates for a long-term investment horizon, typically spanning five years or more. She believes that disruptive innovation takes time to mature and realise its full potential. This strategy demands patience and the ability to endure short-term volatility and potential losses.

Active Management Approach

Wood engages in active research and handpicks individual companies for investment. This proactive portfolio oversight allows her to customise her portfolio according to her distinct vision of disruptive innovation. However, this approach contrasts with passive investing, which follows broad indexes, and may not suit all investors.

Portfolio Transparency

Wood is known for her transparency, regularly sharing her investment thesis and research. This level of transparency is unusual in the investment industry and may be appealing to investors who value open communication. However, it is essential to note that transparency does not guarantee successful investments, and Wood's funds have experienced significant losses.

Understand how it differs from other tech ETFs

Understanding Cathie Wood's ARK ETFs

Cathie Wood is the founder, CEO, and CIO of ARK Investment Management LLC, and she is responsible for picking stocks for the firm's ARK exchange-traded funds (ETFs). ARK ETFs are known for their focus on disruptive innovation, which ARK defines as the introduction of technologically enabled new products or services that change the way the world works. This sets ARK ETFs apart from other tech ETFs as they specifically target companies that are innovating and disrupting their respective industries.

ARK's ETFs include the ARK Innovation ETF (ARKK), ARK Next Generation Internet ETF (ARKW), and ARK Genomic Revolution ETF (ARKG). These ETFs invest in companies across various sectors, including multiomic technologies, healthcare, communications, and information technology. Unlike many other tech ETFs, ARK's funds are actively managed, meaning that the stocks are carefully selected by Wood and her team rather than simply tracking an index. This active management strategy has drawn a following on Wall Street, with many investors attracted to Wood's high-risk, high-reward approach.

One key difference between ARK ETFs and other tech ETFs is their investment strategy. While many tech ETFs focus on well-established tech companies, ARK seeks out innovators in fields like fintech, robotics, and space. This strategy has led to outperformance in recent years, with big investments in companies like Tesla, Roku, and Zoom. However, it has also led to criticism, with some arguing that Wood's strategy of putting a large portion of her firm's assets in a small number of risky stocks is too risky.

In addition to their unique investment strategy, ARK ETFs also differ from other tech ETFs in their structure. While most tech ETFs are passively managed and track a specific index, ARK's funds are actively managed and focus on disruptive innovation. This means that ARK's stock picks are not limited to a particular index, allowing them to invest in companies across a wide range of sectors and industries. This active management approach has led to higher returns in favourable market conditions but has also resulted in underperformance during market downturns.

Overall, ARK ETFs stand out from other tech ETFs due to their focus on disruptive innovation, active management, and willingness to invest in relatively risky but potentially high-reward companies. While this strategy has drawn criticism during market downturns, it has also contributed to ARK's strong performance in recent years, highlighting the unique characteristics of these ETFs.

Assess whether it's overvalued

Cathie Wood's ARK Innovation ETF has been described as "the greatest speculative bubble of all time" by finance expert Michael Burry. Burry, who famously bet against the housing market in the mid-2000s, believes that the fund is overvalued and has shorted it.

ARK Innovation's price has multiplied fivefold over the past five years, outpacing the S&P's gains by more than two to one. However, relatively few of ARK's holdings are profitable, and the fund is dominated by companies that are losing money. Of the 41 companies that represent 98% of dollars invested, only 13 posted positive net profits over the past four quarters, with a total profit of $161 million. The other 28 holdings posted losses, with ARK's second-largest investment, Teladoc, losing $41 million.

ARK's portfolio is heavily focused on healthcare technology, particularly young biotech companies, which typically lose money in the early years while developing new therapies. However, most of these investments fail to pay off, and ARK holds a significant number of these losing stocks. Overall, ARK Innovation's investments are losing $169 million a year.

In addition, some of ARK's largest holdings, such as Robinhood Markets (HOOD), have seen their share prices increase due to investor optimism, but are still down significantly from their all-time highs. HOOD, for example, is down 73.9% from its peak.

Cathie Wood has also been accused of playing with fire by investing heavily in a handful of risky stocks, such as Tesla, Roku, and Zoom. This strategy has drawn criticism and led to the creation of the Tuttle Capital Short Innovation ETF, which bets against ARK Innovation.

While Cathie Wood and ARK Invest have a large group of loyal investors, the recent underperformance of some of their top funds has led to questions about whether their aggressive strategy is still effective.

Consider a balanced approach

Cathie Wood is the founder, CEO, and CIO of ARK Investment Management, also known as ARK Invest. ARK Invest is a disruptive force on Wall Street, with Wood at the helm making big bets on big ideas. She has been in the investment industry for over 40 years and has a reputation for her casual approach to volatility and her inclination to embrace risks.

Wood's ARK Innovation ETF (ARKK) has outperformed the broader market in the past few years, thanks to big investments in companies like Tesla, Roku, and Zoom. However, some experts question her strategy of putting a large portion of her firm's assets into a handful of risky stocks.

When considering investing in Cathie Wood's ARK ETFs, a balanced approach is essential. Here are some key considerations:

Diversification

Rather than putting all your eggs in one basket, it is prudent to diversify your investments across various assets and sectors. While Wood's focus on disruptive innovation can be lucrative, it is important to remember that these investments carry higher risks due to their volatile nature.

Long-Term Investment Horizon

Wood typically operates with an extended time horizon, often spanning five years or more. She believes that disruptive innovation takes time to mature and reach its full potential. This strategy demands patience and the ability to weather short-term volatility.

Proactive Portfolio Management

Wood engages in active research and handpicks companies for investment, allowing her to customize her portfolio according to her unique vision. This approach enables her to be nimble and adapt to changing market conditions, which is crucial in the fast-paced world of innovative technologies.

Growth Potential

Wood prioritizes growth potential over traditional value investing strategies. She targets companies with substantial growth prospects, even if they have higher valuations. This approach can lead to significant price appreciation and long-term market outperformance.

Contrarian Perspective

Wood is not afraid to go against the grain and invest in companies that may be unpopular in the broader market. This contrarian approach carries risk, but it also offers the potential for substantial rewards if her investments prove successful.

Risk Management

While embracing risk is a key tenet of Wood's strategy, it is crucial for investors to comprehend these risks and ensure they align with their own risk tolerance and investment objectives. Conduct thorough due diligence and ensure that any investment in ARK ETFs is suitable for your risk profile.

In conclusion, when considering investing in Cathie Wood's ARK ETFs, a balanced approach involves diversification, adopting a long-term horizon, proactive portfolio management, focusing on growth potential, embracing a contrarian perspective when appropriate, and carefully managing risks. By considering these factors, investors can make more informed decisions that align with their financial goals and risk tolerance.

Evaluate the performance of Cathie Wood's other ETFs

Cathie Wood's ARK Invest has a variety of exchange-traded funds (ETFs) with different focuses, and their performance has varied.

The ARK Innovation ETF (ARKK) is the flagship fund and has made big bets on risky companies such as Tesla, Roku, Zoom, and Coinbase. While this fund has attracted a large group of loyal investors, it is down about 20% in 2021, even as the broader market has rallied to near record highs.

ARK ETFs focused on fintech (ARKF) and the internet (ARKW) stocks are each down more than 10% in the same year. The ARK Genomic Revolution ETF (ARKG), a genomics/healthcare-themed fund, has plunged more than 30% in 2021. The ARK Space Exploration & Innovation ETF (ARKX), a new space exploration fund, is down almost 15% since its launch in March.

The actively managed ARK Autonomous Technology & Robotics ETF (ARKQ) is the only fund up in 2021, with a 5% gain, but it is still lagging the rest of the market.

ARK's ETFs have a high-risk, high-reward strategy, and their performance has been mixed. While some funds have surged in previous years, their recent underperformance has led some investors to question the viability of Cathie Wood's strategy.

In addition to the funds mentioned above, ARK also offers the following ETFs:

• 3D Printing ETF (PRNT)
• ARK Israel Innovative Technology ETF (IZRL)
• 21Shares Bitcoin ETF (ARKB)
• 21Shares Active Bitcoin Futures Strategy ETF (ARKC)
• 21Shares Blockchain and Digital Economy Innovation ETF (ARKD)
• 21Shares Active Bitcoin Ethereum Strategy ETF (ARKY)
• 21Shares Active Ethereum Futures Strategy ETF (ARKZ)

Frequently asked questions