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These Super-Popular ETFs are Starting to Deflate - Why You Should Care

From a broader perspective, pessimism often has a way of infecting lots of investors beyond just the technology crowd.
These Super-Popular ETFs are Starting to Deflate - Why You Should Care

Note from me, Jeff - I put this article on the bottom of today's previous "newsletter" email. As a result, almost no one clicked on it! But I think it's important - and explains a lot about the hazards of the current drip-drip melting of the market in recent days.


It seems that every market cycle has one or two mutual fund managers who become cultural superstars....

A few decades ago, that person was Peter Lynch, the best selling author and former Fidelity mutual fund manager. Between 1977 and 1990, his stock picking skills allowed him to beat the S&P 500 for all but 2 of his 13 years as manager of Fidelity's Magellan Fund (quite a feat, then and now).

More recently, a fund manager named Cathie Wood, founder and CEO of the ARK Invest family of mutual funds, has captured folks' attention.

You can't search on the internet about the stock market without running across lots of stories about what she's buying and selling these days...

Cathie Wood - her every stock buy is closely watched and talked about.

And for good reason. Since 2015, her first tech-focused ARK Innovation (ARKK) fund rose rose an astounding 700%.

Roughly two-thirds of that gain happened between March last year and February this year, when Wood - who clearly has lots of guts and conviction - doubled down on her stock bets during the worst of the pandemic and reaped the rewards.

But here's what has me a bit worried, not just for Cathie Wood's account holders but for the health of the overall market over the next few years...

Wood controls 4 funds - ARK Innovation, ARK Genomics (ARKG), ARK Fintech (ARKF), and ARK NextGen Internet (ARKW).

All of them look like bubbles that have popped and are now in the long process of deflating.

Here's Wood's flagship ARK Innovation fund:

Wood's genomics-based fund looks even worse:

Why Should You Care about Cathie Wood's ARK Funds?

Suppose you don't own any Cathie Wood-type funds. Suppose you're not an account holder at her ARK mutual fund operation. What difference does the sagging performance of her funds make to you?

I'll give you 2 reasons...

  1. We should care because her kinds of stocks - oriented towards high-risk/high-reward, with companies that are often selling an idea more so than an actual functioning business with revenue and profits - have been the "go-to" stocks for millions of investors over the past 12-18 months.

If those stocks have lost their mojo, and keep losing ground, it would mean that a substantial cross-section of investors are getting more pessimistic about the economy, monetary conditions, etc (the exact reasons are usually only clear in the rear-view mirror).

And from a broader perspective, pessimism has a way of infecting lots of investors beyond just the technology crowd.

2. Deflating bubbles - presuming that's what we're seeing - tend to take a looooonnng time to unwind.

So if my observations turn out to be correct, lots of smaller tech-oriented companies could be in a world of hurt - with intermittent rallies - for the next couple of years.

Don't believe me?

Compare the full 3 years of the 2000 dotcom from peak to trough:

It also has implications for us as investors.

One, our own stock picking may get a lot harder (not impossible, just harder) - because we're "swimming against an outgoing tide."

Two, if we want to succeed with better stock picks, perhaps we need to expand our horizons a bit. Instead of buying just growth-oriented tech stocks, maybe we need to focus on other kinds of ideas - mining, turnaround plays, value stocks, off-the-beaten path companies.

Best of goodBUYs,

Jeff Yastine