Cathie Wood: The Top ‘Wealth Destroyer’ of the Decade

So, I love looking into the world's best investors, right? It's kind of my thing here on the channel. But one of the most requested videos I get is to take a look into Kathy Wood and Arc Invest. This is a really interesting case because Kathy Wood was once a high-flying investor. If you look at the returns for the Arc Innovation ETF around 2020 and early 2021, that's really something.

However, if you look anytime beyond February 2021, the story changes dramatically. This poor performance has led her to being labeled one of the top three wealth destroyers from 2014 to 2023, losing $7.1 billion of shareholder value in 10 years. She's a divisive character; some people love her for her forward thinking and big bets on the future of technology. Others see her as nothing more than an effective marketer who gambles her clients' money and gets rich doing it.

So, in this video, let's look at exactly what happened to Arc Invest and why, after all's been said and done, the strategy that they've implemented has failed so spectacularly. To understand the fund that is Arc Invest, we first need to understand its founder, Kathy Wood. Kathy has had an interesting career in finance. She was an assistant economist at Capital Group, worked there for three years, moved to New York, and took the role of Chief Economist, analyst, and portfolio manager and managing director at Jenison Associates, where she stayed for 18 years.

In 1998, she then co-founded a New York City-based hedge fund called T. Rowe Capital Management, and then in 2001, joined Alliance Bernstein as Chief Investment Officer of Global Thematic Strategies, where she managed $5 billion. So, she's got plenty of experience, although even back then her performance was questioned when she actually managed to underperform the market during the global financial crisis. So, experience? Yes. Performance? Up in the air.

But moving from Alliance Bernstein, she then starts Arc Invest in 2014 after her idea of actively managed exchange-traded funds based on disruptive innovation was actually deemed too risky by Alliance Bernstein. Also, coincidentally, her first four ETFs were seeded with capital from Bill Huang of Arc Global Capital. Yes, for those that need a refresher, he's the guy that was found guilty of fraud and market manipulation after his giant investment fund imploded, causing literally billions of dollars of losses in several major banks left holding the bag.

Now, of course, I'm not implying that Kathy had anything to do with this guy beyond the initial funding for her ETFs, but it's kind of a funny coincidence. So, she starts Arc Invest in 2014, and her flagship fund is called the Arc Innovation Fund (ARKK). This fund is designed to hold stocks based on the investment theme of disruptive innovation, and the way they define disruptive innovation is, quote, “the introduction of a technologically enabled new product or service that potentially changes the way the world works."

We're talking autonomous transport, neural networks, cloud computing, crypto, and more—really new tech that could change the world but hasn't been proven yet. So, what's actually in this fund, I hear you ask? As of right now, we're talking companies like Tesla, Roku, Coinbase, Roblox, Block, Crispr Therapeutics, the genetics company, Robinhood—the list goes on—and it's very top-heavy too. As of February, this fund had 33 positions, with the top five accounting for 42.69% of the portfolio.

So, it's a technology innovation-based fund; it's quite concentrated and dependent on the returns of businesses that are trying to disrupt the world in one way or another. So, why is there so much coverage of this fund in particular, and why is there so much praise as well as so much criticism for Kathy Wood? Well, as you can probably already understand, it's due to the performance of the fund over time.

If we rewound to 2020, all the media coverage was unbelievably positive for both Kathy and for Arc Invest. They looked like geniuses because their big calls were turning into gold. After trading around $37 in the March 2020 lows, not one year later, the Arc Innovation Fund had risen upward of 300%. Phenomenal returns! Kathy had become the new Warren Buffett, and on the whole, media coverage was good.

Kathy Wood's Arc Innovation becomes the largest actively managed ETF amid a 170% 2020 return. Kathy Wood takes the crown from JP Morgan for the largest active ETF. Forbes was featuring Kathy as one of America's richest self-made women. Bloomberg was singing her praises. Kathy was everywhere. The fund's amazing success in 2020 was largely on the back of Tesla stock rising in that time period.

Tesla, which was caught up in a huge wave of speculative buying, rose an unbelievable 1,300%. But with it occupying roughly 10% of the Arc Innovation ETF at the time, it made Kathy seem an absolute genius, especially after going out on a limb and putting forward exceptionally optimistic price targets for the stock. Expected value is roughly $2,000, meanwhile, Tesla bull Kathy Wood raised her price target to $2,600 per share. The base case, uh, it's a 5-year target, so the end of 2024, uh, it's $7,000.

But that was kind of the allure of Kathy Wood; she would make these big bullish calls. She would put out these monster price targets. She would double down on these companies, and at the time, she was getting it right. You'd see her every week on one program or the next backing her methods so confidently. It was easy to jump on the Arc Invest hype train, and to be honest, that's what Arc Invest wanted.

The way that Arc Invest makes money is by charging fees on their investment products. The more people that believe her and buy into her fund, the more money she makes. And that's the thing: her funds aren't cheap. Her flagship Arc Innovation Fund has an annual fee of 0.75%. So, for every $100,000 that gets invested into that fund, she makes $750 in annual fees.

Compare that to, say, SPY, the world's largest S&P 500 index fund; the fees there are 0.945%. $100,000 invested in SPY will generate State Street just $94.50 in annual fees—nearly eight times less per year. I don't think there's a fund manager in this country that could get away with this kind of thing other than Kathy Wood. I mean, it's funny these different percentage chances she puts on things—a 25% probability Tesla could be worth $4,000 a share.

So, the marketing machine of Arc Invest is very real. But as we saw in 2020, the strategy worked. The big predictions, the podcasts, the CNBC features—all paid off because the stocks in her portfolio did very well. Kathy was the queen of investing; it was all going her way, and the result? Massive inflows into her funds, which skyrocketed her net worth.

In fact, as Morningstar notes, Arc Invest's ETF had assets of just $3 billion at the end of 2020; by the end of 2021, fund assets topped $34 billion thanks to immense inflows and strong performance—pretty remarkable. But with every boom comes a bust, and unfortunately for Kathy Wood, the fun time stopped in February 2021. As the year progressed, investors grew frustrated by a lack of performance, and then in 2022, as the Federal Reserve started to tighten economic conditions through high interest rates, things started getting ugly.

From the peak in February 2021 to the end of 2022, the Arc Innovation ETF fell a staggering 80%, as the businesses in that portfolio suffered under the weight of tougher market conditions. Tesla fell steeply throughout 2022. Roku lost most of its value. Coinbase fell as crypto got obliterated in 2022. Roblox suffered, Block fell steeply, Crispr got hammered—literally all of Kathy's big stocks got pummeled, and it was a bloodbath for Arc Invest shareholders.

As you might expect, the media headlines changed too. Kathy went from a stock-picking genius to a speculator—a gambler—but perhaps none quite as damaging as this Morningstar article, which analyzed the top 15 wealth-destroying funds over the past 10 years. They found the ARK Genomic Revolution ETF lost investors around $4.2 billion across that time, and the flagship fund was found to have lost them over $7 billion.

In fact, the Arc Innovation ETF was the third largest destroyer of wealth over that time period and was surpassed only by leveraged ETF products. So, with that said, what's the conclusion? Is Kathy Wood a misunderstood genius or is she something closer to a fraud? Well, to be clear, I don't think she's actually scamming people. Her ETFs are just actively managed investment products that people can choose to buy or not buy if they want.

But I also wouldn't exactly call what she's doing investing. The Reddit post is "Kathy Wood's trading strategy is a form of value investing," sums things up pretty perfectly, with the top comment replying, "LOL no, she's a speculative investor focused on tech hype and Bitcoin," with others noting that she is too focused on unprofitable companies and calling out her strategy of applying ludicrously positive assumptions. One commenter summed up her strategy as a combination of speculation and promotion, and this is about where I sit with my conclusions as well.

I personally would not call her an investor, and that's based on the Benjamin Graham definition of an investment. Graham said in his book "Security Analysis" that, quote, "an investment operation is one which, upon thorough analysis, promises safety of principle and a satisfactory return." Kathy's relentless focus on new and upcoming tech stocks may set her up for the possibility of large returns in rosy market conditions, as was seen in 2020.

However, in structuring her fund this way, she violates Graham's first principle, which is safety of principle. Compare this with Berkshire Hathaway, sure, you may not make 200% in a year, but Buffett is protecting your capital as a first priority and is then targeting a satisfactory return beyond that. The Arc Fund shows no attempt made to protect your capital, and you can see that in the companies they hold. In fact, I listed out their top 10 holdings, and for the year ending in December 2023, only two of them made money from their business operations. They were Tesla and Palantir; the other eight were all unprofitable.

The fact of the matter is, the only conditions that work for portfolios like this are low-interest rate, highly speculative markets because these businesses burn money. What they really need to survive are easy borrowing conditions, AKA low-interest rate environments—or they need speculative buying frenzies in the stock market to enable them to raise large chunks of money from overly optimistic investors. Long story short, when interest rates rise and market conditions get tougher, these stocks will typically get crunched—and lo and behold, that's exactly what happened.

If we look at the stock charts for these unprofitable businesses over the past few years, you can see a definite trend, and it's not a good one for Arc shareholders. So, what's the verdict on Kathy Wood and Arc Invest? Well, I should probably say that what I've said is by no means intended to imply a buy, hold, or sell recommendation on their stocks. Of course, any advice is general in nature, and it might not be right for you.

At the end of the day, everybody is in charge of their own money, and for all I know, you know, the shares could go up 100% across the next year. But personally, for the long-term wealth accumulation value investing strategy that I follow, it's a pretty easy pass for me. I think these portfolios are designed for the best of times and only ever work in the best of times, and I think at best we can probably call them a gamble. It's certainly a world away from a rational long-term investment portfolio.

I do think Kathy and Arc have done extremely well with their marketing, and they have been able to capture that speculative crowd, which ultimately has led to massive inflows into their ETF products and has made Kathy a heck of a lot of money. But personally, instead of buying into lofty price targets, I would much rather prefer to buy into stable businesses with strong growth and healthy cash flows.

But with that said, let me know what you think down in the comments. Would you invest in Arc Invest ETFs? Have you in the past? Are you a shareholder now? What do you think of their marketing strategy? Is it preying on people's confirmation bias? Definitely let me know that stuff down in the comment section below.

And as a quick side note, if you want to learn the actual Warren Buffett rational investing approach, definitely check out "Introduction to Stock Analysis" over on New Money Education. Use the code "SAVE50," you can save 50 bucks off that course. But with that said, guys, that'll do us for today. Please leave a like on the video if you did enjoy it, subscribe if you would like to see more, and I'll see you guys in the next one. [Music] Oh! [Music]