Ark’s Cathie Wood warns investors they’re making one of the greatest misallocations of capital in history

• Cathie Wood said investors are making a mistake by piling into index funds.
• Companies that have prospered in the past are often ripe for disruption, the Ark Invest boss said.
• The tech-stock guru said it’s riskier to own benchmarks than Ark’s funds.

Cathie Wood said risk-averse investors and fund managers are putting money in companies and benchmarks based on past successes, instead of betting on innovative companies.  

“We have, I think, one of the most massive misallocations of capital in the history of mankind. You have investors investing in the past,” the CEO and CIO of Ark Invest said in a CNBC interview this week.

Wood said legacy companies are attractive to cautious investors as they’ve prospered before, but they’re often susceptible to being overtaken by more innovative rivals.

“Benchmarks are where they are, and especially the largest companies and stocks in the benchmarks are where they are, because of past successes. If we’re right, those are the companies that are going to be disrupted,” she said.

She defended Ark’s funds, which have tumbled in value this year, and said her research into disruptive innovation is the best in the financial industry. She also warned that owning index funds is more dangerous than investing with Ark.

“Those benchmarks are where the risk is, not our portfolios,” she said.

Wood said she sees significant potential in innovative companies using blockchain technology and artificial intelligence, and praised the breakthroughs in AI in the past few years. She pointed to Tesla as a company using AI as a competitive advantage, noting it’s the kind of business she prizes.

“Tesla has been the best case in point and I think we have a lot of Tesla-like stocks in our portfolio,” she said.

Wood suggested the dot-com crash and financial crisis have cowed investors, spurring them to own index funds and proven companies instead of betting on innovative upstarts. She confidently predicted that certain stocks held by Ark would return to their pandemic highs.

ARK Invest’s flagship ARK Innovation ETF (ARKK) had a stellar performance in 2020, surging over 150%, but disappointed in 2021 by dropping 23%. It is down 30% in 2022.