Cathie Wood, chief executive officer and chief investment officer of Ark Investment Management.
This is the year that investors will have to stop using the words “index funds” and “exchange-traded funds” interchangeably. That was never quite accurate, but for most of their history ETFs’ main appeal was that they delivered very low-cost exposure to broad market indexes such as the S&P 500 and the Russell 2000. And then along came Cathie Wood.
The head of Ark Investment Management has shaken up the $5.6 trillion ETF industry with her slate of actively managed funds. As with all ETFs, the funds’ shares can be bought and sold instantly just like stocks. Wood made bets on the bullish themes of 2020— Tesla Inc., tech stocks, biotech, and Bitcoin—and got the returns to match. In the past year alone, Wood’s Ark Innovation ETF took in almost $10 billion from investors, as it rose 149%. “It does demonstrate clearly there is a market for actively managed ETF products,” says Ben Slavin, head of ETFs for BNY Mellon Asset Servicing.
Wood is in many ways a throwback to the glory days of conventional mutual funds in the 1980s and ’90s. There are TikToks with Wood’s image alongside young investors espousing the benefits of Ark products. “You just don’t see those kinds of videos for IWM,” says Eric Balchunas, ETF analyst for Bloomberg Intelligence, referring to the iShares Russell 2000 ETF. “Cathie has completely revitalized the rock star portfolio manager, which we thought was a dead concept. She proved it can kind of happen again.”
Other asset managers—from T. Rowe Price Group Inc. to Invesco Ltd.—have been piling into the active ETF game. The appeal is fees. A big, broad index ETF might charge just 0.05% of assets per year. The average active equity ETF has an expense ratio of 0.72%. Active funds generate 8% of the ETF industry’s revenue despite making up only about 3% of the assets.
Of course, the appetite for active funds will depend on their returns and ability to stay ahead of indexes. Stockpickers could once gain an edge over the broad market by including shares of Tesla, but now that the company has joined the S&P 500, that advantage has disappeared. “Active ETFs offer some structural benefits, but they are still extremely reliant on that manager’s strategy and how they execute on it,” says Ryan Sullivan, senior vice president of
Brown Brothers Harriman’s global ETF services. It’s worth remembering why index ETFs are popular: Over the decade through June 2020 (the most recent data available), about 82% of large-cap stock funds lagged the S&P 500, according to S&P Dow Jones Indices.
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