Why Now Might Not Be the Time to Invest Like Cathie Wood

Cathie Wood, the CEO of Ark Invest, has become one of the more recognizable names in the investing world. She is known for her interest in growth stocks and because her investment firm often places big bets on disruptive innovators. Her flagship exchange-traded fund (ETF), Ark Innovation ETF (ARKK -0.10%), was one of the early investors in innovative tech companies like Tesla, Zoom Video Communications, and Coinbase Global.

Wood’s Ark Invest made a major bull run during the early part of the pandemic, going from $3.5 billion in assets under management in early 2020 to $50 billion just a year later. That was the quickest growth of any ETF firm in history, according to The Wall Street Journal. The Ark Innovation ETF increased by over 300% from March 2020 to February 2021.

The pandemic-driven success of Wood’s funds led many investors to adopt a similar style, but the conditions that allowed many of the portfolio’s companies to flourish — like extremely low interest rates and excess free cash floating around the system looking for a place to invest — have since gone away and unplugged the money-printing machine on their way out. Nearly all the gains seen in 2020 and 2021 have since been erased and the stock trades at levels last seen in late 2019.

Given the current economy, here’s why now might not be the time to invest like Wood.

Consumer staples aren’t going anywhere

The level of economic anxiety in the economy has been elevated for about a year now. Recession fears rise and fall with each new release of various (and often conflicting) economic indicators. Nobody can say with 100% conviction if we’ll enter a recession or not, but investors should be preparing for the worst and hoping for the best.

That preparation means investors start to lean more on companies and industries that have proved to be recession-resistant. Procter & Gamble, for example, sells dozens of consumer brands ranging from Tide detergents to feminine hygiene products like Tampax, to popular diapers like Pampers, to over-the-counter health remedies like Vicks to toothpastes like Crest. If a recession comes, consumers are more likely to cut back on discretionary purchases like going to a restaurant or buying a TV and saving what funds are available to buy their trusted brands.

The same can be said about companies like Verizon Comunications and AT&T (T -0.41%). A cellphone and internet access didn’t used to be, but they have now become essentials in American life. If someone needs to cut expenses, you can bet there are a lot of other expenses that’ll be dropped before a cellphone subscription.

The same cannot be said about many of the industries and companies that Cathie Wood and her Ark Invest team invest in. The companies Ark focuses on tend to be in earlier stages of their development and don’t have a history of showing they are essential in people’s lives or that the companies can flourish in rough economies.

Be rewarded for your patience

In the life cycle of a typical successful company, it tends to start with the company growing quickly and investing all its profits back into the company to create additional growth. Eventually, the company matures, establishes itself, finds an equilibrium on spending, and starts to produce more profit than it knows what to do with. At this stage, those excess funds often go toward stock buybacks or dividends.

Investors in growth companies look for the rewards associated with the big stock price increases that come from other investors also trying to benefit from the further growth of the company. Investors in income companies are more interested in the total return generated, giving up outsized stock gains in exchange for a piece of the profits now being generated (the aforementioned dividends). It’s one of the ways they reward investors for their patience: Regardless of a company’s stock price, you know you’ll receive your dividend.

The only way you’ll currently make money with Tesla stock is if the price increases. If you’re an investor in AT&T, on the other hand, you’ll receive $1.11 per share annually, no matter what its stock price does. You can never predict what the stock market will do, but dividends (and many of the companies in a position to pay them) can help provide a bit of stability.

Hedging risks is always a good thing

All of this isn’t to say that Wood’s Ark Invest ETFs are bad; that’s not the case. Many of her funds contain great companies doing great things. The point is that during an economy like we’re currently experiencing, defensive stocks — companies with great financial standing and products or services that sell no matter what — often see an influx of investors for a reason.

You don’t want to flip your investing style because of stock market conditions (you would constantly be changing it if so), but your investing style should be diverse to account for changes in the economy. By mixing strategies and putting new investing dollars into all sorts of stocks, you create an effective hedge. Just because you prefer an investing style doesn’t mean you should embrace only that style.

Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Coinbase Global, Tesla, and Zoom Video Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.