Cathie Wood’s Ark Investment Management has racked up more than $300m in fees at its flagship exchange-traded fund since it started nine years ago, while wiping out nearly $10bn of investor cash in the same period.
Investors have continued to pour money into the Ark Disruptive Innovation ETF, known by the ticker ARKK, over the past two years even as it has been badly burned by the decline in tech stocks.
Ark has recovered more than 70 percent of its $310 million in fees since the fund’s value fell by nearly three-quarters from its February 2021 high, according to FactSet data. This year has brought in an average of about $230,000 per day as ARKK’s price has recovered slightly, increasing by a quarter.
“Investment fees have provided ARK and Cathie Wood with a wonderful life,” said Elisabeth Kashner, director of global funds, research and analytics at FactSet. “His investors weren’t very lucky.”
Fund managers have amassed a loyal following for big bets on fast-growing technology companies, which until early 2021 have generated huge profits for investors and attracted inflows.
The ARKK Fund has supported risky companies that are seen as radically reshaping the future in technology, robotics, biotechnology and space exploration.
More than $3bn flowed into ARKK in the first two weeks of February 2021 as the fund rose more than 700 per cent from launch, bringing its assets to $27.9bn. But the environment of rising interest rates that hammered growth stocks led to a slump in value. It currently manages $7.6bn in assets.
ARKK is very expensive — annual management fees of 0.75 percent of assets are about twice the average for actively managed ETFs, according to FactSet.
The fee bill draws attention to ARKK’s unusually high investor retention for an underperforming ETF. Flows persisted even as the fund lost $9.5bn in investor cash on Wood’s bold bets, according to Morningstar data.
“It is extraordinary that investors who chased back on the way up did not reverse course,” Kashner said. “Most investors are stuck with Cathie Wood.”
Many investors may experience such huge losses that they are reluctant to withdraw their funds. “There is a category of investors who are trapped,” said Ben Johnson, head of client solutions at Morningstar. “They have an anchor with the price they bought, and they hope to come back.”
The fund experienced modest outflows when ARKK’s share price rose earlier this year, allowing investors to exit by cutting their losses. “They’re seeing a rebound, and it’s a better opportunity to get out than last year,” said Todd Rosenbluth, head of research at VettaFi, a New York-based consultancy. “People don’t seem to be chasing strong performance.”
Johnson said the extremely high volatility of the fund has attracted a class of investors who use derivatives to generate returns from large price swings.
“If the price chart is low enough and there is a sufficient level of volatility in the price of the instrument, then it will attract demand from many different – I can’t use the word investors – that meet, and profit from, volatility,” he said.
A strategy aimed at profiting from the volatile price of ARKK – a short trileveraged ARKK ETF launched in November 2021 – has increased volatility in the underlying fund, according to Johnson.
Ark did not respond to requests for comment.
Wood said in a presentation to investors at the end of January that “innovation is punished” in the last quarter of 2022. But he reiterated his commitment to invest in “disruptive innovation” that will lead to an “exponential growth trajectory” despite accruing large losses.
Since the beginning, ARKK investors have lost almost 27 cents per dollar in weighted returns – meaning that, on average, every dollar invested in the fund is now worth 73 cents, according to FactSet. Investors who bought at the peak are down more than 74 percent.
“[Wood’s] high costs for the sector,” said Kashner. “But investors have become their worst enemy. People commit the main sin of chasing back.”