As S&P 500 Hits All-Time Highs, Is It Time to Dump Cathie Wood’s Underperforming Ark Innovation ETF?

As S&P 500 Hits All-Time Highs, Is It Time to Dump Cathie Wood’s Underperforming Ark Innovation ETF?

Cathie Wood first gained notice as a top growth investor when her flagship ARK Innovation ETF (NYSEMKT: ARKK) soared 85% in 2017. She then followed that up with returns of 35% in 2019 and a whopping 149% in 2020.

With the fund’s huge 2020 returns, Wood’s popularity soared, and investors poured money into her ARK Innovation ETF. She became renowned as an investment guru with great insights into stocks at the cutting edge of technology.

With her popularity, Wood became very outspoken on some polarizing investments, such as Tesla. She has a $2,000 price target on the electric vehicle (EV) stock, which she expects it to reach by 2027. With Tesla stock trading well below $200, hitting that target in three years seems unlikely.

A difficult few years

Following Wood’s big 2020 gains and soaring popularity, the ARK Innovation ETF struggled with a 24% loss in 2021, followed by a 67% decline in 2022.

After a solid 68% rebound last year, 2024 has seen more losses with the exchange-traded fund down 19% year to date. The S&P 500, meanwhile, has been hitting new all-time highs and is up 10% this year.

To make matters worse, growth stocks have been driving much of the market’s gains recently, which is supposed to be the type of environment in which Wood’s investments thrive. However, that hasn’t been the case.

ARK Innovation ETF’s stated goal is to invest in disruptive innovation, but Wood has largely missed out on the stocks benefiting the most from perhaps one of the biggest innovations of our time: artificial intelligence (AI).

She has missed out on much of Nvidia‘s incredible gains by selling a large percentage of her Nvidia holdings in Nov. 2022, before completely exiting the stock in Jan. 2023.

Tesla, which is ARK Innovation’s largest holding at about 11.6% of its portfolio, has been a big drag on the ETF with the stock down almost 30% year to date. The company has struggled with slowing EV sales, while it has yet to see autonomous driving or other innovations take hold. Roku, the ETF’s No. 3 holding, has been another big detractor, down 38% this year. Roblox, its sixth-largest position, is also down close to 30%.

Great Depression comparison

Wood recently looked to deflect from her ETF’s poor performance, saying the current market reminded her of the Great Depression when investors crowded into the largest stocks because they thought they were safe. She then noted that these winners underperformed the market in the following years.

One problem with Wood’s assessment is that other indexes geared toward small and mid-cap stocks are up with the Russell 2000 rising 15% over the past year and the S&P 400 mid-cap index up over 20% as well. While they’re trailing the performance of the S&P 500 over the same period, they’re still outperforming the ARK Innovation ETF.

Even if Wood is correct in her view that the market rally will broaden, it doesn’t mean the ARK Innovation ETF will outperform. It also doesn’t mean the stocks that have been powering the S&P 500 will be laggards. Many are at the forefront of major trends like AI while still trading at attractive valuations given their growth prospects.

As S&P 500 Hits All-Time Highs, Is It Time to Dump Cathie Wood’s Underperforming Ark Innovation ETF?

Wall St. street sign.

Image source: Getty Images.

ARK Alternatives

At this point, the ARK Innovation ETF is on track to post another year of losses, this time in a bull market. That type of performance is a tough pill to swallow.

For investors looking to dump the ARK Innovation ETF and invest in other growth-focused ETFs, the Invesco QQQ Trust (NASDAQ: QQQ), which tracks the Nasdaq-100 index, and the Vanguard Growth ETF (NYSEMKT: VUG) are two great alternatives. Both are up more than 30% over the past year, and their 10-year average annual returns top the S&P 500 and ARK Innovation ETF by a wide margin.

Despite their outperformance, they’re much cheaper to invest in than the ARK Innovation ETF as well. Wood’s firm charges investors in its flagship fund a 0.75% expense ratio, far higher than the 0.20% and 0.05% for the Invesco QQQ and Vanguard Growth ETF, respectively.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Roblox, Roku, Tesla, and Vanguard Index Funds – Vanguard Growth ETF. The Motley Fool has a disclosure policy.

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