Why Cathie Woods’ ARK investors aren’t making much money

In the Bible, Noah populated his Ark with every animal, two-by-two.

By comparison, Cathie Woods’ ARK funds are more like ships of experimental embryos.

As I explained in Investors’ Great Expectations for Disruptive Technologies, most of the companies in Wood’s funds aren’t making business profits.

But that didn’t stop investors from recently rushing in, seduced by the big gains they saw in 2020.

Ark’s Next Generation Internet ETF (ARKW) gained 157.46 percent last year.

ARK’s Fintech Innovation ETF (ARKF) soared 152.82 percent.

The firm’s Genomic Revolution ETF (ARKG) ballooned 180.56 percent.

The ARK Innovation ETF (ARKK) gained 152.52 percent and the firm’s Autonomous Technology & Robotics ETF (ARKQ) rose 107.22 percent.

For the first few months of 2021, each fund continued to earn double-digit gains.

But then something changed.

As of May 14, 2021, year-to-date returns for four out of five of these funds were negative.

The single exception was ARK’s Autonomous Technology & Robotics ETF (ARKQ). It gained 1.0 percent. Meanwhile, the S&P 500 was up 11.68 percent (January 1, 2021 – May 14, 2021).

The bulk of the ARK fund losses began in late February.

From February 26, 2021 to May 14, 2021, all five funds posted double digit drops. That compares to a 9.8 percent gain for the S&P 500.

Below, you can see how much $10,000 would have grown (or dropped) in each respective fund.

February 26, 2021 to May 14, 2021

*from February 26, 2021 to May 14, 2021
Source: Morningstar.com

Still, anyone who invested in ARK’s flagship Next Generation Internet ETF (ARKW) when it was launched in 2014 would have made a fortune…if they didn’t mess around.

A $10,000 investment on September 30, 2014 soared to $77,263 by May 14, 2021. That’s a compound annual return of about 37 percent. In contrast, a $10,000 investment in Vanguard’s S&P 500 Index grew to $23,924.77 over the same time period. That’s a compound annual return of about 14.2 percent.

But The Wall Street Journal, referencing analysis from Bespoke Investment Group, says the average investor in Cathie Wood’s five funds only earned about 5.24 percent per year from the funds’ inception dates to Monday, May 10, 2021.

In other words, most people who invested in a U.S. stock index thrashed that return.

Most ARK investors haven’t done well because they bought high. When the price went up, they added more money. If you’re following investment forums, you would have seen how investors touted these funds as a can’t-miss opportunity to make a fast fortune. FOMO went wild. Consequently, more investors piled in when the fund prices soared.

It’s extraordinary to think how investors could have earned just 5.24 percent per year since these funds’ inception dates.

After all, Cathie Wood’s first four funds earned compound annual returns of 39.77 percent (ARKW); 25.87 percent (ARKG); 33.97 percent (ARKK) and 25.87 percent (ARKQ) since they were launched on September 30, 2014.

Her fifth fund (ARKF) averaged a compound annual return of 55.28 percent since its inception on February 4, 2019 (These were the posted annual returns published on the ARK Invest website on May 14, 2021).

But when analysts calculate investors’ returns, they use a money-weighted average. In other words, most of the money that people poured into these funds wasn’t invested in 2014. It wasn’t invested in 2015, 2016, 2017 2018 or 2019 either.

And most of the money that was added from 2015-2019 would have flooded in after strong performing years, with far less being added (or even sold) when the funds disappointed investors.

That’s how the average investor from 2015 to 2019 and again from 2019-2021 paid an above-average price.

When investors see something that has risen fast (whether it’s a hot stock, a hot fund, or a cryptocurrency) they pour money in. And when that fund sinks, they cease to buy or they sell.

The ARK funds might yet recover. Or, they might plunge to painful depths. I can’t see the future.

But I do know this: most investors underperform the posted returns of the funds they buy–especially when such funds appear to mock the laws of physics.

Too often, people rush into rising funds, and they expect them to keep flying.

They sell or cease to add new money when those same funds drop back to Earth. Investors in index funds don’t fall (as often) for the same primal trap of chasing past performance.

Morningstar concluded the same thing.

Instead of chasing hot funds, investors should remain disciplined. It’s far easier (and more profitable) to build a globally diversified portfolio of low-cost index funds or ETFs.

Rebalance the portfolio to maintain a consistent allocation and don’t be tempted by fear and greed. After all, investing isn’t a sprint, it’s an ultra-marathon.

Trying to sprint, during a lifetime run, only leads to a crash and burn.

 Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.