What's Wrong with Cathie Wood's Ark ETF
- Ishfaaq Peerally
- Jun 2, 2021
- 2 min read
📉 About 13 months ago, I made a video about the dangers of ETF investing and I said that the ARK ETF $ARKK of Cathie Wood will not end well. It seems that I was right since the ETF is 𝙙𝙤𝙬𝙣 𝙤𝙫𝙚𝙧 𝟯𝟱% 𝙛𝙧𝙤𝙢 𝙖𝙡𝙡-𝙩𝙞𝙢𝙚 𝙝𝙞𝙜𝙝. We cannot really judge Cathie Wood's returns over these last 7 years since we had only a bull market with much liquidity. She has beaten the market $SPX500 by a big margin but should we expect this to continue over the long-term? I am not sure about that.
💸 𝙏𝙝𝙚 𝙛𝙞𝙧𝙨𝙩 𝙥𝙧𝙤𝙗𝙡𝙚𝙢 𝙞𝙨 𝙬𝙞𝙩𝙝 𝙖𝙘𝙩𝙞𝙫𝙚 𝙀𝙏𝙁𝙨 𝙩𝙝𝙚𝙢𝙨𝙚𝙡𝙫𝙚𝙨. They give a false sense of security. For example, the Ark ETF has 54 companies but they are all correlated with each other. For instance, Tesla $TSLA and Teladoc $TDOC , the two largest positions peaked in the same week and then crashed by more than 30% both. According to the definition of the ETF, Cathie Wood will only invest in innovation. Therefore, she cannot really protect investors by making use hedges as a hedge fund would do.
⚠️ Normally when a fund manager becomes famous, more money will flow into the fund and they run into the problem of trying to find new investments, and sometimes they are going to 𝙩𝙖𝙠𝙚 𝙢𝙤𝙧𝙚 𝙧𝙞𝙨𝙠𝙨 𝙩𝙝𝙖𝙣 𝙪𝙨𝙪𝙖𝙡. This is common to hedge funds and active ETFs. Fortunately, this is not something that happens to Popular Investors on eToro :) or to a holding company like Berkshire Hathaway $BRK.B .
Even though the ARK ETF is going down, more money is flowing into the fund and Cathie can buy stocks at cheaper prices. What will happen if cash outflow becomes bigger than inflow? She will be forced to sell since any active ETF have to be backed by real underlying assets. These assets are held by a market maker that usually borrows them. If prices fall, the market maker might force her. Selling always triggers more selling.
I'm not telling you not to invest in ARK ETF or any other ETF but you need to understand that past success is not equal to future success. 𝙈𝙖𝙠𝙚 𝙨𝙪𝙧𝙚 𝙮𝙤𝙪'𝙧𝙚 𝙞𝙣𝙫𝙚𝙨𝙩𝙞𝙣𝙜 𝙞𝙣 𝙖 𝙨𝙩𝙧𝙖𝙩𝙚𝙜𝙮 𝙩𝙝𝙖𝙩 𝙬𝙤𝙧𝙠𝙨 𝙛𝙤𝙧 𝙩𝙝𝙚 𝙡𝙤𝙣𝙜-𝙩𝙚𝙧𝙢, like value investing.
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