Elon Musk and Cathie Wood agree that passive management's takeover of the investing world has gone too far — and has prevented investors from reaping big gains
Ark Invest, File (for Wood) and Hannibal Hanschke/Pool Photo via AP, File (for Musk).
- Cathie Wood and Elon Musk both agree that passive investing's dominance has gone too far.
- Wood argued that passive investing prevented many investors from enjoying massive gains in Tesla's stock.
- "There should be a shift back towards active investment. Passive has gone too far," Musk said.
Ark Invest's Cathie Wood and Tesla CEO Elon Musk both agree that the relentless rise of passive investing has gone too far, according to a series of tweets from the pair.
It's not a surprising view given that Wood runs an active investment management firm that has billions of dollars in assets under management while Musk's Tesla was shunned by traditional passive indexes for years.
Passive investing strategies have amassed trillions of dollars in assets ever since Vanguard's Jack Bogle popularized the investment strategy. Those fund inflows mostly came at the expense of active mutual fund strategies.
Musk kicked off the exchange April 30, when he tweeted "There should be a shift back towards active investment. Passive has gone too far."
Wood responded to Musk on Wednesday with the fact that passive investment funds prevented many investors from having exposure to a 400-fold gain in Tesla stock, as the electric vehicle company went public at a $1.6 billion valuation and wasn't included in the S&P 500 until it had a market value of about $650 billion.
"According to ARK Invest's research, most broad-based passive funds are 'short' disruptive innovation at a time when the global economy is undergoing the largest technological transformation in history," Wood said, adding that she believes the shift towards passive investing will represent a "massive misallocation of capital."
But passive investing does offer benefits to investors who are focused on the long-term, namely much lower fees relative to active investment strategies, and often more consistent performance relative to the broader market.
For example, Ark Invest's flagship ETF charges an annual expense ratio of 0.75%, while the popular Invesco QQQ Trust, which tracks the tech-heavy Nasdaq 100, costs investors an annual fee of only 0.20%. That 0.55-percentage-point difference may not seem like much, but over the lifetime of a portfolio, which is often decades, it could add up to a significant amount of money.
But what's more, it has been found that consistently outperforming the broader stock market is insanely difficult, even for market pros. According to data from S&P Global, 95% of US active equity funds underperformed its benchmark over a 20-year period on a risk-adjusted basis.
Ark Invest's flagship ETF, which enjoyed significant outperformance relative to the Nasdaq 100 during the COVID-19 pandemic, has since floundered and erased all of its outperformance over the past year as higher interest rates ding speculative tech stocks that Wood is known to favor.
Since Ark's ETF was launched in late 2014, it has returned 182%, while an investor who bought the lower-cost, passive Nasdaq 100 ETF would have enjoyed gains of 245% over the same time-period, according to data from Koyfin.
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