Savage Marketing
ARK Takes Aim at Passive Investing
This is one of the more savage pieces of marketing that I have come across in the past few years. Anyone who has been paying attention to the investment landscape has probably come across ARK Invest. They are having an extremely impressive run investing in innovation. I am a believer as I have said many times in the past. I am a long-time, happy, shareholder of the ARK Innovation ETF (ARKK).
Back to the commercial. What they are doing is saying their way is better. Their way is active management. Actually doing research and picking stocks. Active investors believe that the market can be beat. They think that the time and effort spent doing deep dive research on companies and sectors can lead to returns that are greater than that of the overall market. This is a hotly debated issue.
The opposite of active investing is passive investing. Passive investing has become all the rage. Instead of doing real research and picking stocks (or bonds or commodities), passive investors just own the whole market. They operate under the view that the market can’t be beat so you should not bother trying. Passive investing is taking share from active investing. In fact, in early 2019, history was made when the amount of money invested in passive strategies surpassed the amount of money in active strategies. At least that is how Institutional Investor put it. The problem that I have with passive investing is that when you own the “whole market”, you own the trash too. So when you own the S&P 500, you own Technology on the left (good) but you also own Energy on the right (bad) in their proportions.
The team at ARK, led by Cathie Wood, is taking aim squarely at the passive investment industry. I believe in active management. I can understand why some people, who do not have the time to dedicate to research, would favor passive products. But, for me, it’s active all the way. Actually, that’s not 100% accurate. I manage my account in two ways. One is purely active stock picking using a combination fundamental and technical analysis. The other is actively managing passive products such as ETFs. Regardless, in both instances, I am using my knowledge and skills to make investment decisions with my money.
Every one of the people who I have mentioned on this site and in these notes believes in some form of active management. Honestly, that’s why I follow them. But back to ARK. They unleashed their commercial at a time when they are riding high. Their “flagship” (my description) fund has returned 94% year-to date. By comparison, the Nasdaq 100 has returned ~32%. So the team at ARK has roughly tripled the return of the strongest market in the US year-to-date. Sounds amazing, and it is but, there is no free lunch in the world and certainly not in markets. While the ARK fund has crushed the competition, there was a price. That price came in the form of extra volatility. Over the past year, ARKK has been more than twice as volatile as the Nasdaq 100 ETF (QQQ). By the way, QQQ is more volatile than the S&P 500 ETF (SPY). The point is, yes the ARK team is killing it, but they are taking on more risk to do it. And that’s fine as long as you know what you own. I am holder because I believe in the theme. I know there are going to be times when the fund gets hit…hard. I adjust the size of my investment accordingly. Just this year, in the heart of the COVID market meltdown here is what the peak to trough drawdowns looked like:
SPY: ~35%
QQQ: ~30
ARKK: ~45%
That will give a sense of just how well ARK has done since the bottom in March, they are up 94% this year AFTER taking a 45% hit. But that hit was much bigger than the hit to the “overall” market.
So they are having a great run. I am a happy owner, as I said, I just hope that this commercial is not the thing that we point to in a year and say “yup, that was the top!”