Tech Funds: Cathie Wood Can’t Fight the Fed

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Cathie Wood became one of Wall Street’s best-known fund managers thanks to her push into the US technology sector. This year, ella’s flagship ETF Ark Innovation is up 29 percent, easily outpacing the S&P 500’s less than 8 percent gain. Net outflows, however, according to Morningstar exceed $19 million. Hard-hitting predictions have become a harder sell as rates rise.

Created in late 2014, the Ark Innovation ETF aims to support disruptive innovation. The bolder the plan, the better. See WoodThe support of Palantir, which wants to take over “the entire market” in artificial intelligence. Palantir is trading at 54 times forecast earnings. That’s higher than most software-as-a-service peers.

But Wood’s forecasts remain dreamily off. Bitcoin, the world’s largest cryptocurrency, is trading at over $26,000. Wood has claimed that by the end of the decade he will reach a million dollars. She says electric car company Tesla, which has a market capitalization of $573 billion, could be a $6 trillion company in the next four years. It is true that the demand for Tesla vehicles is increasing. Elon Musk wants deliveries to go from a record 1.3 million vehicles last year to 2 million this year. But Tesla is helping demand by cutting prices, which means the net income margin is expected to shrink.

More than a third of the fund is invested in five stocks, including Tesla, Zoom Video Communications and the Coinbase crypto platform. Focused investing in large stocks explains why it tracks the broader tech sector market performance, from record price highs at the end of 2021 to subsequent valuation drop and then recovery in 2023.

The problem with the Ark Innovation ETF is that, like the tech sector in general, its performance is closely tied to expectations of US interest rate hikes. That undermines any reputation for stock picking. Predictions that the Fed has stopped raising rates for now have renewed interest in tech stocks. Any hint of change will push back that recovery.