Here's the little-known reason why Cathie Wood's ARK Innovation ETF is having such a bad year

Here’s the little-known reason why Cathie Wood’s ARK Innovation ETF is having such a bad year

Now almost everyone knows that the ARK Innovation ETF ARKK,
+ 0.76%
A very bad year. But poor stock selection isn’t the only reason behind the poor performance of the fund, which is run by famed stock fund manager Cathy Wood. Another reason, overlooked, is the culprit: the portfolio is highly concentrated in a few stocks.

According to Morningstar Direct, ARK Innovation’s 10 largest holdings account for 58.9% of the portfolio. That’s concentrated over 93% of all other actively managed US equity funds (both open-ended and ETFs) in Morningstar’s database. It’s more than double the concentration of the S&P 500 SPX,
+ 0.31%
The top 10 stocks represent 27.7% of the total market capitalization of the index.

This year through June 2, according to FactSet, ARK Innovation is down 51.8%, more than four times the similar total return loss of 11.9% for the S&P 500.

To see if ARK Innovation is more the exception than the rule, I analyzed the annual returns of the 10% of actively managed US equity funds in Morningstar’s database with the most focused portfolios. These are the funds with the highest percentages assigned to the 10 largest holdings. On average, these ten funds lost 13.3% through June 2, according to Factset, 1.4 percentage points worse than the S&P 500.

2022 is not just a coincidence. Over the past 10 years, this ten most concentrated has lagged behind the S&P 500 by 2.0 percentage points annually – 14.7% annually to 12.7%.

To be fair, market lag isn’t just limited to the decimal tier of funds with the most concentrated portfolios. However, these averages show that big and bold bets by no means guarantee success.

Focus can pay off

This bleak picture of concentrated money is not the end of the story. It turns out that a greater percentage of these funds outperformed the market over the long term than less concentrated funds. Over the past decade, for example, 27.6% of funds in the top ten most concentrated have outperformed the total return of the S&P 500, versus 12% among funds outside of this ten most concentrated.

What this means: If you were to pick a random fund from the decimal point of most focus funds, you would have a one in four chance of beating the market. In turn, you will have a one in eight chance of beating the market when choosing a chest at random from among the chests not in this top ten most concentrated.

This is the good news. The bad news is that funds in the top ten most concentrated also have a higher chance of lagging significantly behind the market.

To appreciate this good news/bad news, consider the 10-year yield range for the less concentrated and more focused portfolios. For the most concentrated decimal funds, that range runs from 22.6% annually to minus 19.9% ​​- a difference of 42.5 percentage points. For less concentrated decimal funds, this range runs from plus 13.7% per annum to plus 6.8% – a difference of 6.9 percentage points.

Investment hints: Play it safe or collapse. When you play it safe, you lose out on the possibility of defeating the market often or at all, in order to reduce the risk of market delays by significant amounts. It’s just the opposite when you fall back: you take the risk of big losses in order to stand a chance of big wins. it’s your choice.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert rating tracks investment newsletters that pay a flat fee to review. It can be accessed at

more: Cathie Wood’s ARK Innovation hijacked Tesla. She buys a dip.

Read also: 5 big companies will emerge from the wreckage of technology as scarier

2022-06-06 11:18:00

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