How Cathie Wood Changed the ETF Industry Forever

Most investors use exchange-traded funds to track various indexes. Sometimes, those indexes are well-known, such as the Dow Jones Industrials or the S&P 500. In other cases, fund companies create brand-new indexes just so they'll have something that their ETFs can track. Regardless of where the index comes from, passive investing inherently involves trying to match the performance of some established benchmark.

But for those who still believe that stock-picking can allow investors to beat the market, a passive ETF strategy isn't necessarily compelling. That drive to outperform led to the adoption of actively managed ETFs in the late 2000s. And although it took a while for the active ETF movement to gain steam, one innovative investment professional broke ties with her former employer and set out to be the face of active ETFs. Cathie Wood's ARK Innovation ETF (NYSEMKT: ARKK) has generated a lot of buzz, both positive and negative, and so it would be an oversight for the Voyager Portfolio not to take the time to dig into the fund to learn more about it.

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The arc of Cathie Wood's career

Wood didn't always set out to become an ETF entrepreneur, but when the situation arose to move forward in that direction, she seized it. After having gained experience as a portfolio manager at AllianceBernstein (NYSE: AB), Wood started her own ETF company, ARK Invest, in 2014. In doing so, Wood sought to follow a contrarian approach, embracing companies that many Wall Street analysts had qualms about or didn't follow.

In practical terms, that required Wood to avoid passive strategies and fully embrace the active ETF model. Yet even that act by itself raised questions. ETFs are required to release their holdings on a daily basis, which meant that every move that Wood made managing an active ETF would be open to scrutiny in near-real time. By contrast, traditional mutual funds typically reported their holdings only on a quarterly or monthly basis, giving fund managers time to identify prospects and build positions before the general public got wind of it.

Nevertheless, that didn't stop Wood from moving forward with ARK Innovation. The fund was designed to capture companies that were engaged in what Wood called "disruptive innovation" -- technological improvements and scientific advances in areas such as cloud computing, digital assets, neural networks, autonomous mobility, and intelligence devices.

Given those criteria, it might seem as though ARK Innovation ETF was destined to be loaded with technology stocks. Yet because Wood was willing to invest not only in the companies that created cutting-edge technology but also the ones that put such technology to use in advancing their own business models, the ARK Innovation ETF has ended up having a much more balanced mix of sector exposure than you might think.

The ARK Innovation ETF largely flew below investors' radar during the first several years of its existence. However, Cathie Wood's flagship ETF hit the big time in 2020, when the COVID-19 pandemic brought those same technology-forward companies to the forefront. Huge gains ensued, and as is often the case in the ETF industry, past success drew the attention of investors chasing performance and hoping that the good times would last far into the future.

How Cathie Wood became a household name

The dramatic performance of ARK Innovation matched up well with the dramatic optimism that Wood brought to the mix. Despite making sometimes bombastic predictions, enough of what the ARK Invest founder said actually came to pass that Wood gained a loyal following. In the second article of this three-part series on ARK Innovation ETF for the Voyager Portfolio, you'll get a closer look at exactly how Wood's ETF performed for its longtime shareholders.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.