Photo: Bloomberg
In the weirdest year of our lives, the rise of Cathie Wood is hardly the weirdest thing to happen. But still. She is the first star in an industry, the US$6.3 trillion ($8.35 trillion) world of ETFs, that wasn’t supposed to have any. She is a throwback — a money manager who is actually famous among regular investors, like Peter Lynch or Warren Buffett. And not only is she the first woman to play that role, she has taken a throne in the pantheon of meme stock demigods, up there with the Elon Musks and shiba inus.
Wood moves stocks with her trades and her tweets. On social media and in online forums around the world, her name is synonymous with a certain brand of technophilia, an enthusiasm for the next big thing, whether that is robotics or gene editing or digital currencies. Some of her bolder predictions for Bitcoin and Tesla came true, to the shock of Wall Street analysts who found them ridiculous.
The company she founded, ARK Investment Management, went from an unprofitable niche operator to a runaway success in just a few years. Her flagship ARK Innovation ETF gained almost 150% in 2020, then as much as 26% more in the new year. Droves of investors, many of them young novices, bet on Wood, pouring almost US$21 billion into ARK in 2020.
‘Ready for prime time’
In the depths of the pandemic, she championed a beautiful future where technology would make everything better and more profitable. It was part of a rising subculture of belief, in both technological change and financial risk-taking, that reached a fever pitch in the dark winter of 2021. Stocks soared even as the coronavirus carnage mounted: joblessness, business closures, deaths. Retail traders with stimulus checks shocked hedge funds by bidding up GameStop and other meme stocks. Wood’s swift ascent was emblematic of a struggle playing out in financial markets, where investors giddy over the promises (and entertainment value) of innovations such as cryptocurrency seemed to be winning out over sceptics. Dogecoin, created as a joke, surged 20,000%.
Sooner or later, the market was bound to turn on her. Vaccinations accelerated, and the economy reopened. Investors responded by turning from speculative high-tech stocks toward boring ones that would benefit from a broader recovery. Wood’s flagship fund gave up all its 2021 gains and then some. As broad stock indexes continued to climb, she went from having one of the best performances among money managers to losing money year-to-date.
She blamed fears of inflation for sending “the innovation-oriented part of the stock market” — her bread and butter — into a correction. Tesla tumbled more than 30% from its peak, the same amount Bitcoin fell in one shocking morning in mid-May.
Wood’s always-online fans are sticking by her. Investors who poured a net US$34 billion into ARK’s eight funds in the past 12 months have withdrawn only about US$1.2 billion since the end of February. They are betting that the world, emerging from Covid-19, will catch up to the future she proselytises for. To the true believers, her sudden fame will not be an oddball footnote in market history, like GameStop, but a forerunner to decades of glorious change.
She drives home her message with repetition. “We have a five-year investment time horizon,” she says over and over again, especially when her funds are dropping in value. She spreads the word in a steady stream of videos, webinars, and commentaries posted on ARK’s website, along with frequent appearances at conferences and on media including CNBC, Bloomberg TV, and a variety of investing podcasts. Despite this, ARK turned down requests for an in-depth interview for this story.
As Wood and her company’s research frequently remind investors, electrification, the telephone, and the internal combustion engine turned the world upside down a century ago. Now, she tells anyone who will listen, five technologies — AI, blockchain, DNA sequencing, energy storage, and robotics — are bringing about an equally profound transformation of the economy. These innovations will converge, recombine into things like autonomous taxis and whatnot, and create a perfect economic storm of higher wages, falling prices, and wider profit margins. That leads to “virtuous cycles” of more investment in faster innovation.
It’s a lot. And it may be familiar to anyone who remembers that other spasm of tech-stock fever, the dotcom bubble. But Wood has a riff ready for that, too. “The dream was right. It was just 20 to 25 years too early,” she often says. Now, “the seeds are beginning to flourish. We are ready for prime time”.
Unlikely evangelist for change
In some ways, Wood is an unlikely evangelist for change. She is 65 and conservative, both politically and economically. For decades she has championed green investments, but she rarely uses the terms “climate change” or “clean energy”. She has donated to Trump’s presidential campaign and associated Republican political action committees in 2020, Federal Election Commission records show. Her mentor is Arthur Laffer, the 80-year-old economist who has pushed his tax-cutting philosophy on Republican presidents since Ronald Reagan, ideas many modern economic thinkers blame for ballooning inequality.
Wood has bemoaned President Joe Biden’s plans to spend big and tax the wealthy, even though many of his proposals are designed to bring the economy closer to her futuristic vision for it, and though higher capital-gains taxes could push more money into tax-efficient funds like hers. She warns that higher taxes on companies and investors will discourage future innovation.
She surrounds herself with an unusually young and diverse team at ARK, some of whom openly disagree with her politics. About a quarter of ARK’s staff of about 35 are people of colour. One-third are women, and most are younger than 35. The office culture is, by all accounts, collegial, casual, and collaborative. “Cathie believes in a circle table as opposed to a rectangular table,” Kellen Carter, ARK’s chief compliance officer, told Bloomberg last year. “She wants everyone around the table offering their ideas.”
Every Friday morning, Wood convenes an investment ideas meeting with her analysts and outside experts that is part business school seminar and part free-form futurist bull session. Wood’s techno-utopianism comes through loud and clear, occasionally to a degree that surprises her employees. “I thought I was a tech obsessive,” said James Wang, who was until February ARK’s AI analyst, last year. “Cathie, it turns out, is even more aggressive than I am in imagining future outcomes. She sees things management itself hasn’t even considered.”
By her own description, Wood spent her childhood as “a very serious little girl”. Her parents, Gerald and Mary Duddy, immigrated to the US from Ireland. Gerald worked on military radar systems, and so Cathie, the oldest of four children, grew up on US Air Force bases in England, Ireland, Alabama, upstate New York, and California. Her father’s interest in technology and investing made an impression on her.
She met Laffer at the University of Southern California, where she majored in finance and economics and he was a professor of graduate-level classes. Wood graduated in 1981, and Laffer helped her land a job at Capital Group in Los Angeles as an assistant economist. She joined AllianceBernstein Holding LP in 2001, where she oversaw more than US$5 billion focused on innovative growth investments.
At AllianceBernstein, she first hit on the idea that would transform her career. ETFs are mutual funds that trade throughout the day like stocks. Their flexible, tax-efficient structure allows anyone to buy in, with shares that can be created depending on demand. They are typically fully transparent, eliminating any confusion around why prices are going up or down, and based on a set list of investments rather than the judgment of a human manager.
The ETF boom was just beginning when Wood suggested AllianceBernstein introduce its own, with a twist: an ETF that would be actively managed. The idea never went anywhere because, she said later, executives “weren’t quite sure what it would mean for their business model”. For one thing, ETFs, which usually have lower fees, could have created cheaper competition for the company’s existing mutual funds. AllianceBernstein declined to comment.
Starting ARK
By 2014, Wood had left and started her company, ARK. The name officially stands for Active Research Knowledge, though she has also said it was inspired by the Old Testament Ark of the Covenant. The early years were rough. Wood, then 58 and not well known, financed the company out of her life savings, and had a hard time finding investors willing to take a chance on an actively managed ETF. The inherent transparency of ETFs did not help the pitch: Wall Street traders typically guard their brilliant investment ideas like the crown jewels. With ARK, any investor can see what Wood’s funds own and copy her ideas day by day.
A rare source of capital was her friend Bill Hwang, a hedge fund trader and fellow Christian who had founded his family office, Archegos Capital Management, a year before she started ARK. She and Hwang met in 2013. The ARK Innovation ETF debuted in October 2014, along with specialised funds focusing on autonomous technology and robotics, the internet, and genomics. Hwang provided seed capital for all four. His risky bets caused Archegos and his US$20 billion fortune to implode in a couple days in late March 2021.
ARK eventually stopped losing money for Wood, posting strong if volatile returns from 2017 through 2019. But few investors paid much attention — until last spring.
A transformative pandemic
Wood had been preparing for something like the pandemic for a long time. “The best thing that can happen for us — and this is going to sound odd — is a crisis,” she said on a podcast in February 2019. “It’s usually when innovation takes root and gains traction.” Previous crises had taught her that fearful and uncertain consumers and companies are willing to try new things. She was optimistic even during the financial crisis, according to a former colleague at AllianceBernstein who spoke on the condition of anonymity. The disruptions of the 2007– 2009 recession ultimately boosted some of her favourite stocks then, such as Salesforce.com and Amazon.com.
In March 2020, Covid cases were spreading exponentially. Stock indexes crashed 8%, the biggest one-day drop since 2008. But Wood was confident about what it all meant: Biotech holdings would get a lift, she said, along with Illumina, a long-standing holding that makes gene-sequencing technology. Worries about international supply chains would finally popularise 3D printing, after decades of predictions that it was about to take off.
What is remarkable, looking back, is how much pre-Covid Cathie Wood sounds like herself today. She sticks to the same talking points in interviews years apart. Her vision of the future has not changed appreciably, even if her timeline has accelerated.
She frequently mentions Wright’s law, the theory that the more of something that gets produced, the faster its cost goes down. For example, the price of screening a patient’s genes for multiple cancers has fallen from US$30,000 to US$1,500 in five years, and should drop to US$250 by 2025, ARK estimates. That would make annual genetic screenings affordable, saving 66,000 lives each year — more than “any medical intervention in history”, she says. The same principle would slash the costs and inconveniences of transportation, as cheaper and cheaper batteries rapidly replace the internal combustion engine. ARK expects electric vehicle sales to soar from 2.2 million worldwide in 2020 to 40 million in 2025.
The pandemic turned out to be the transformative crisis Wood had been predicting — at least for her investment returns. From its March 2020 low to its February 2021 peak, the ARK Innovation fund jumped more than 350%. (Even after its recent selloff, the fund is still up about 220% from then.)
Nonetheless, she underestimated the virus itself. Echoing Trump, she compared Covid to the flu in March 2020. A month later, she worried that the federal government’s stimulus law, the US$2.2 trillion Cares Act, was too generous and might hold back the economic recovery by giving workers incentives not to work. Ironically, those stimulus checks would get credit for luring a generation of young people into stock trading.
The Wood phenomenon
Wood’s profile soared. Her Twitter following multiplied 28-fold since late 2019; she surpassed 900,000 followers after an interaction with Elon Musk’s 56 million-follower account. From a global fan base, she acquired a range of nicknames including “Money Tree” in South Korea and “The Godmother” in Hong Kong. TikTok and Twitter are full of videos and memes celebrating her as a stockpicker and a female role model.
The investing industry’s response to ARK’s success was, of course, to copy it. Giants including BlackRock, which manages $9 trillion, launched products built around themes such as robotics and self-driving cars. MSCI, one of the largest creators of the sort of indexes that Wood has spent years critiquing, collaborated with ARK on new ones inspired by her approach.
Financial advisers, tasked with steering customers to prudent investments, struggle to handle the Wood phenomenon. Earlier this year, Leon LaBrecque, chief growth officer for Sequoia Financial Group, said clients could not stop asking about her, even as her performance was beginning to falter. He bought shares of the ARK Innovation ETF and ARK Genomic Revolution ETF for his own portfolio in 2019. After driving a Tesla and becoming fascinated by the car, he loved the idea of investing in an ARK fund and capturing some of the benefits of Tesla without shouldering 100% of the risk.
But LaBrecque sold his personal ARK positions this year, saying he is uncertain whether the company can continue growing at the rate it did in 2020. He does not recommend ARK funds to clients, though he will buy shares if they specifically request it.
In 2020 and early 2021, Wood and her online defenders had an easy response to detractors: Look at her record. Her 2018 prediction that Tesla would hit US$4,000 a share — which much of Wall Street found laughable — came true in early 2021. When Wood first bet on Bitcoin, in 2015, the cryptocurrency traded around US$230. It peaked at over US$63,000 in April.
Since then, Tesla has tumbled back below her 2018 target, which would now be US$800 a share adjusted for a 5-for-1 stock split. As an unforgiving market has pushed ARK’s flagship fund down a third from its peak, the sceptics have gotten louder. They were especially vociferous in March when ARK unveiled its new price target for Tesla, a 2025 “base case” of US$3,000 a share, a fivefold increase. ARK was ridiculed for, among other things, saying Tesla could elbow into the car insurance industry, building a US$23 billion business in a few years — an assertion, critics said, that showed the company just did not understand how insurers are regulated and how much capital they require.
Equally baffling to many auto experts are ARK’s projections for electric vehicles, which suppose a tenfold increase in production in just a few years, and for Tesla’s creation of an autonomous taxi network, based on a technology — driverless cars — that doesn’t really exist yet. Wood says traditional auto analysts do not understand Tesla, which she sees as a technology company far more than a carmaker. “Tesla has pulled together the right people with the right data with the right vision,” she says.
As for her crypto enthusiasms, her company projects Bitcoin will become a sizeable part of mainstream portfolios, including 401(k)s and pensions. In February, Wood said Bitcoin could even replace bonds in the traditional 60/40 stock-bond portfolio — in other words, investors en masse would swap the stability of bonds for a new, untested, and highly volatile asset. That seems like a stretch, even by 2021 standards.
ARK has also made some policy changes that have not exactly allayed concerns about Wood’s appetite for risk. It used to impose a 20% limit on the amount of a company’s shares any ARK ETF could own. It scrapped that cap in late March, giving her the flexibility to make even bolder, more concentrated bets in the future.
In the same filing, ARK said it may buy into special purpose acquisition companies, or SPACs, the blank-check companies that have also become a stock market craze in the past year. The Securities and Exchange Commission has warned investors about buying shares of SPACs backed by celebrities, including professional athletes, and Wood has said some SPACs “are going to end badly”. In March, though, the ARK Autonomous Technology & Robotics ETF bought shares of a SPAC backed by tennis star Serena Williams that merged with 3D-printing company Velo3D to take it public.
Keeping an eye on the prize
As her returns dip, Wood has urged everyone to keep the faith. “I know there’s a lot of fear, uncertainty, and doubt evolving in the world out there,” she said in a video posted on a Friday after a particularly brutal week for her funds. Look on the bright side, she told her investors. Lower stock prices now mean even bigger returns later for companies like Tesla with — another favorite phrase — “exponential growth opportunities”. On Bloomberg TV, she said: “We keep our eye on the prize.”
Wood may survive being wrong about the little things if she’s right about the big stuff. She and her clients may still make money if we really are at the beginning of a new economy that looks nothing like our pre-pandemic reality. With fears of inflation running rampant, she predicts the opposite, a sort of golden age for companies, workers, and investors. The economy can grow rapidly without triggering inflation, according to Wood, because new technologies can make companies and workers so much more efficient.
An economy transforming this rapidly will have plenty of victims. An ARK “Bad Ideas” report published in October listed several: physical stores and bank branches, linear TV, freight rail and other forms of traditional transportation. Almost half of the S&P 500 is threatened, Wood has said. The hardest hit will be those who spent the past decade juicing earnings rather than investing in the future.
Workers do not face the same threat, says Wood, who has predicted a coming labour shortage. Technology will create vast categories of jobs that “we cannot imagine today”, she has said. Meanwhile, people will outsource tasks such as driving, grocery shopping, and food preparation to others, both robotic and human.
Even assuming the future she envisions does come true, she also has to be right on the timing. Epic breakthroughs can be costly and slow to deploy in the real world. “This is something that plays out over a period of decades, not months or years,” says Erik Brynjolfsson, a Stanford professor specialising in technological change. For example, it took a generation after the invention of electric motors before they became incorporated in assembly lines.
And with any technological change, “it’s a lot easier to identify the companies that are vulnerable than the companies that are going to come out ahead”, Brynjolfsson says. “The winners, a lot of them, are going to come out of left field.” Meanwhile, history is full of hot investors whose luck eventually ran out.
As stocks dropped and Bitcoin suffered a 30% crash on the morning of May 19, its worst decline in seven years, Wood said it “pains me more than anything” to think clients might be panicking and selling at the wrong time. Even when her funds were doing well, she said at a recent Bloomberg Businessweek event, she had tried to “stay humble”, warning colleagues that a severe correction might be ahead. When it arrived, “we’re looking at this and saying innovation is on sale”, she said. “I know it’s been hard for our clients in recent months. Keep the faith.”
She still expected the stocks in her portfolios to more than triple in the next five years, she assured viewers. And Bitcoin, which almost fell to US$30,000 that morning? She still believed her favorite cryptocurrency could someday hit US$500,000. — Bloomberg Businessweek
