The Sinking ARKK and It's Reminder For Investors

It’s rarely a good omen when everyday investors know investment fund managers by name.

In recent years, on the back of a bull market in tech stocks, one name rose to the top: Cathie Wood and her Flagship ARK Innovation fund. Her notoriety skyrocketed after the correct prediction that Tesla’s stock (a big holding in her fund) would grow by 10x over the coming years. The fund followed suit, and soon investor dollars followed the high-flying gains. ARKK took in nearly 10 Billion in assets in 2020. As usual, investors forgot what had been proven time and again: Past results are no guarantee of future performance.

Armed with a great 5-year return, and new investor dollars, Wood and the fund accelerated its noise-making marketing. Below is the promotional video from late 2020 that mocked low-cost, diversified investing approaches:

If pride truly comes before the fall, you can guess how 2021 went for ARKK.

Ironically, those “Bad Idea” sectors they named had a great 2021:

Transportation: +26.3% (IYT)

Banking: +34.8% (XLF)

Real Estate: +40.3% (VNQ)

Communiations: +13.8% (VOX)

Retail: +42% (XRT)

The broad-based market (ITOT) strategy they poo-pooed also held up just fine, growing over 25% for the year.

If anything, investors should remember that nothing works all of the time.

Investment strategies take their turns outperforming each other:

Investing trends go through seasons as much as anything else. There are various reasons for the changing returns, but it can be summarized by human nature: We tend to feel good about investing when something is going up, and selling when it’s going down. This goes opposite the ultimate investment manifesto of buying low and selling high.

That’s one reason diversifying investments can be effective: You’ll usually have some that are working while you wait for the others to rebound. Your account will never be at the top of the leaderboard, but you’ll also probably avoid getting caught up in bubbles and massive asset wipeouts.

As for ARKK, they (and their growth fund peers) will probably be fine into the future. Who knows how long the dry spell will last? Great growth stocks have a history of major pullbacks to shake out the hot money. Despite Cathie’s new bold predictions, we wouldn’t expect the next 5 years to look anything like to last 5.