Why Morningstar Is Downgrading Cathie Wood's ARK Innovation ETF To Negative

Zinger Key Points
  • "She has saddled the portfolio with greater risk by slashing its number of stocks to 35 from 60 less than a year ago — thereby amplifying stock-specific risk — and growing its aggregate exposure to companies in which ARK Investment Management is a large shareholder," a Morningstar analyst says of Cathie Wood.
  • This strategy has only increased the firm's vulnerability to severe declines, he says, adding that Wood's reliance on instinctual investing is another risk factor.
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ARK Innovation ETF ARKK shares ended Friday's session higher, despite being downgraded by Morningstar on risk management concerns.

Morningstar analyst Robby Greengold cut his rating on Cathie Wood's flagship fund from Neutral to Negative. 

ARK "shows few signs of improving its risk management or ability to successfully navigate the challenging territory it explores," Greengold said.

What To Know: The Morningstar analyst highlighted the outsized declines the ARK Innovation ETF has seen since its impressive surge in 2020. He noted that Wood has since doubled down on her strategy, which he calls a "perilous approach."

"She has saddled the portfolio with greater risk by slashing its number of stocks to 35 from 60 less than a year ago — thereby amplifying stock-specific risk — and growing its aggregate exposure to companies in which ARK Investment Management is a large shareholder," Greengold said.

This strategy has only increased the firm's vulnerability to severe declines, he said, adding that Wood's reliance on instinctual investing is another risk factor.

Greengold also expressed concerns about the firm's succession plan, noting that Wood is 66 years old and essential to ARK. The investment firm has struggled to retain talent and the remaining analysts "lack deep industry experience," he said.

"ARK could do more to avert severe drawdowns of wealth, and its carelessness on the topic has hurt many investors of late. It could hurt more in the future," the Morningstar analyst concluded. 

ARKK Price Action: The ETF has a 52-week price range of $51.85-$132.50

ARKK gained 1.89% Friday, closing at $67.54. 

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Posted In: Analyst ColorSpecialty ETFsDowngradesTop StoriesAnalyst RatingsETFsCathie WoodRobby Greengold
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