Passive investing “has gone too far,” in the eyes of Tesla CEO (and apparently soon-to-be interim Twitter chief) Elon Musk. And Ark Investment Management CIO, CEO, and Musk booster Cathie Wood agrees.
Responding to a tweet from venture capitalist Marc Andreessen saying managers like BlackRock have outsized voting power in corporate America because of their massively popular index funds. Musk tweeted that he agreed with Andreessen, arguing that “decisions are being made on behalf of actual shareholders contrary to their interests! Major problem with index/passive funds.”
“There should be a shift back towards active investment,” Musk added in a follow-up tweet. “Passive has gone too far.”
Well, a few days later, Wood gave her two cents, arguing that passive investing led many investors to miss out on Tesla’s 400-fold appreciation before it was added to the S&P 500. She also noted that “most broad-based passive funds are ‘short’ disruptive innovation at a time when the global economy is undergoing the largest technological transformation in history.”
Passive funds prevented many investors from enjoying a 400-fold appreciation in $TSLA from a $1.6 billion market cap at its IPO in June 2010 to ~$650 billion when it entered the S&P 500 ten years later in December 2020. https://t.co/O7n8clt1tB
— Cathie Wood (@CathieDWood) May 4, 2022
“In my view, history will deem the accelerated shift toward passive funds during the last 20 years as a massive misallocation of capital,” Wood added.
Citing estimates from JPMorgan, CNBC is reporting that passive investments make up roughly 60% of equity assets. Money has flooded into passive products as investors have been attracted by their lower management fees during booming bull markets. The market for index funds has reached $6 trillion, while the market for ETFs has ballooned to $5 trillion since the SPDR S&P 500′s inception in 1993.
Index investing has also fared far better than active over the past few decades as most active strategies failed to meet their benchmarks. Data compiled by BofA Securities U.S. equity and quantitative strategy head Savita Subramanian show that only 19% of large-cap active managers outperformed over the 12 months ended March 31.
Despite being down 49% year-to-date, Ark Invest’s flagship fund, the ARK Innovation ETF (NYSEArca: ARKK), continues to bring in – and retain – investor capital. In an interview with CNBC senior markets correspondent Bob Pisani at Exchange: An ETF Experience, Wood said that despite ARKK being down, her conviction in the strategy has only increased.
“Our expectation has tripled over the last year for where AI-related market cap will be in 2030,” she said before adding: “our estimates actually have gone up, and the prices have gone down. At the same time, in the private markets, we’re seeing innovation treated very differently.”
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