Get On (or Off) the ARKK!

ARKK has been one of the most popular investments over the past few years. It is often referenced (for good or for bad) and Cathie Wood has an almost rock star status in the financial industry. If we were in the social media industry, you could say ARKK has gone viral.

The Popularity of ARKK

Popularity in social media generally has to do with likes, views, and shares. When it comes to the financial industry, all you need to do is get lucky. Why is ARKK so well known? For one reason only; because of its performance in 2020. There are over 3,000 listed ETF’s. Why does ARKK get so much attention? Because in 2020 it went up 153%. Performance like that will get investors’ interest.

Recently ARKK has been an awful investment. It is down over 70% in the last 12 months (through 11/4/22). Normally, such poor performance is coupled with significant withdrawals. But that is not the case here. FactSet reported that $1.3 billion of assets have flowed into the fund in 2022 alone (through end of September). $500 million of that was added in September after the fund was already down 50% on the year. What gives? It is not typical investor behavior to buy low. Investors are hardwired and emotionally influenced to sell low. Did investor behavior suddenly improve just with ARKK? Something is amiss.

ARKK & Investor Behavior

This question was posed to ARKK. Why are investors buying despite the heavy losses? A representative said (please don’t laugh), “Many shareholders say they are willing to overlook the volatility because they believe in the fund’s potential as a long-term investment.” OK, now you can laugh! Morningstar recently opined, “ARKK shows few signs of improving its risk management or ability to successfully navigate the challenging territory it explores.” If ARKK didn’t have a banner 2020, people would be avoiding this like the plague. Instead they are rushing toward it.

Investors are buying because the recency and representative biases are at play, subconsciously. As well as a healthy dose of greed. People are buying in because they are hoping that Cathie can replicate the returns in 2020. Investors that bought in 2019, before the explosive return, have actually lost money in the “long term.” They are down 20% on their investment, while the S&P 500 is up around 40% during that same time period. ARKK has not been a great long-term investment.

People are chasing Cathie’s prior returns and betting (speculating) the hot hand in 2020 will return again. But it better happen soon, as investors aren’t known for patience. Will she get hot again? Who knows. Bottom line is that this is “mad money” and I would guess that the majority of people buying are not doing it because it is part of a written investment policy/plan.


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