This is a famous quote from the movie, Batman: The Dark Knight and I'm sure most of us understood the meaning behind this.
I can't help but relate this to the situation with Cathie Wood recently.
What happened? You might ask.
As of 5th March, Ark Innovation ETF has lost all of its 2021 gains. This represents a drop of almost 27% from the all time high of $159.7. In stark contrast, the ETF skyrocketed almost 150% in 2020.
And if you all remember, it's not too long ago when everyone is praising how Cathie Wood is the best fund manager in this decade, possibly the next Warren Buffett and so on.
In a twist of fate, these are some of the comments I'm seeing about her on various platforms.
"Cathie is a one hit wonder."
"Cathie Wood got caught up in the hysteria and mania and is delusional..."
"Everyone is a genius in a bull market, including Cathie."
Before I go on to give my own opinion about the situation, let's first explore a few things that Cathie did that possibly cause the fury of some of these investors.
ARK Invest bought more of Zoom shares last week. This got some investors baffled as they couldn't understand why purchasing Zoom at such a high valuation, coupled with the optimism that the pandemic will be ending soon, is a good idea.
ARK Invest bought more of Tesla shares. While everyone knows that Tesla is the biggest holdings for ARK Invest ETFs, some investors are getting uncomfortable with more purchases of Tesla at (again) such a high valuation as this seems some kind of concentrated risk for them. Coupled with the fact that Tesla publicly announce that they bought $1.5 billion in bitcoin, we now have a direct relationship between ARK, Tesla and Bitcoin. As soon as the sentiment for any of these three turns sour, you are going to see them going south really soon (which is what is happening to ARK ETFs and Tesla over the last few weeks).
Of course, these are not the sole reasons behind the phenomenal drop of the ARK ETFs last couple of weeks. The broader environment has also started to work against high-value and tech stocks as the 10-year Treasury yield starts climbing upwards quickly. Being actively management ETFs which hold mainly technology stocks, this is certainly a recipe for disaster for ARK. What goes up quickly over the past year can possibly come down as quickly, some might say.
This now leads on to a few "myths" that people have about the ARK ETFs. Being human, we tend to like to connect the dots and like to associate the consequences of things to certain causes which we believe in. Now that ARK ETFs are being dumped like a rock, some investors are listing the below reasons or rather "myths" behind the success of ARK ETFs in the past year and I thought it's good for me to attempt to dispel these myths.
Firstly, some investors claim that that many investors are mirroring the trades of ARK ETFs and this now forms a reinforcing loop of pushing up the price as whatever ARK ETFs buys will then result in increased buying volume by other retail investors. While that may be good when it's in a bullish situation, it also worsen the situation in the same manner when the market is bearish. Well, this claim isn't exactly true.
In this article, the author did a data analysis on the potential herd behaviour chasing Cathie Wood's trades by accumulating 200 trades for ARKK from 14 January 2021 to 19 February 2021 and compare the percent change in the close price on the day of the announced trade by ARK Invest to the close price on the next day. The results show no real consistency between the close prices of any stocks across any of the two consecutive days in both buying and selling trades during this period. Hence, I believe the claim is mostly hearsay.
Secondly, there is also the claim that Cathie Wood is buying stocks blindly and the outperformance of the ETFs is merely luck as most stocks generally do well in the bull market so there is nothing special about her investment strategy.
Well, this proves to be wrong too. In this article, we see the author comparing the top 10 holdings of ARKG from September 2020 and February 2021 and backtest these top 10 holdings from different periods to better understand if the choices that Cathie Wood make consistently outperform. The results are indeed interesting.
In the backtesting results from January 2020 to October 2020, the top 10 holdings of ARKG as of September 2020 notably outperforms the top 10 holdings of ARKG as of February 2021. In the backtesting results from September 2020 to January 2021, the top 10 holdings of ARKG as of February 2021 notably outperforms the top 10 holdings of ARKG as of September 2020. This shows that the active management by Cathie Wood to constantly rebalances or reallocate the portfolio is valuable to investors as a simple buy-and-hold strategy is clearly not the best strategy here.
Personally, I find that most investors are too caught up with the daily prices of the ARK ETFs and ignore the longer term goal of investing in such ETFs. These ETFs are meant to be longer term hold as they invest in companies which have the potential to be giants in the future. In this process, you are definitely going to face high volatility as this is part of the deal of investing in new technological trends. If you are too focused on the daily performances of these ETFs, then clearly such ETFs are not meant for you.
Having said that, it is still always important to balance these ETFs with other constituents in your portfolio which are diversified in other sectors and provide a seemingly unrelated performance to these ETFs. In my Patreon page, I demonstrate these at length and the results have outperformed Vanguard 500 Index YTD. You may like to check it out.
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