Cathie Wood's Investment Strategy

Who is Cathie Wood? She's the founder, chief executive officer, and chief investment officer of ARK Invest, an asset manager that invests in disruptive innovation. ARK has more than $40 billion in assets under management spread across six actively managed ETFs and three index ETFs.

Wood earned wide respect as a famous investor in 2020 when all six ARK ETFs notched returns greater than 100% -- while the S&P 500 grew a mere 16%. The annihilation of market returns by six separate funds gave credibility to Wood's premise that innovation is the shortest path to growth.

Read on to learn more about the Cathie Wood portfolio, including how ARK finds investable stocks, the top stocks in ARK ETFs, and the types of stocks you won't find in Cathie Wood ETFs.

Cathie Wood's investment approach

Wood's investment approach centers on identifying high-impact innovations. The high-level areas of focus are artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology -- five platforms Wood predicts will be prominent areas of growth and change for the global economy.

Two key concepts underpin Wood's strategy. The first is that not all innovation produces the same opportunity. To Wood, investable innovation cuts costs, spans sectors and geographies, and fosters more innovation. The second is that identifying appropriate investments takes both big-picture and granular research.

1. Investable innovation cuts costs, spans sectors and geographies, and fosters more innovation.

The cost-cutting component is essential because it encourages quick adoption. New solutions that create large-scale efficiencies often generate their own momentum and demand.

The breadth of impact defines the size of the growth opportunity for investors, and innovations that launch follow-on disruptions create longer-lasting growth cycles.

You can see these qualities in play with Teladoc Health (NYSE:TDOC), an ARK-owned company. Teladoc provides virtual healthcare around the world. In 2020, Teladoc acquired Livongo, which offers remote monitoring for chronically ill patients.

At the highest level, employers, health plans, and hospitals use Teladoc's platform to extend the reach of care cost-effectively. Livongo adds to the efficiency story, too, since chronic patients are very costly to healthcare payers.

The virtual healthcare market potential is massive as well. Brandessence market research estimates the virtual healthcare market will grow more than 26% annually to reach $13 billion by[CB1] 2025.

2. Both top-down and bottom-up research is needed to identify the best investment opportunities.

The ARK team finds specific investment opportunities with two layers of research. First, researchers look at big-picture trends to identify innovation platforms and quantify the affected market size. Then they dive into granular data to identify companies that will either lead or benefit from disruptions.

Potential investments are scored individually on factors such as culture, execution, barriers to entry, product leadership, valuation outlook, and[CB2] risk. Interestingly, researchers gather company data from social media and crowdsourcing, as well as traditional sources such as company reports.

Notably, Wood's investment timeline is five years. In her view, that duration maximizes investor returns on these disruptive innovators. In fewer than five years, these stocks can be volatile. Beyond five years, the growth potential can slow.

When projecting a stock's potential over that five-year horizon, Wood looks for a minimum average annual return of 15%.

Cathie Wood's best investments

See the table below for Wood's top investments. Each security in the table comprises greater than 6% of one ARK ETF, and all appear in multiple ARK portfolios.

Data source: ARK-funds.com.

Here's a closer look at the top five Cathie Wood stocks in the table above.

1. Tesla. Wood is bullish on electric carmaker Tesla. In 2021, she cited a price target of $3,000 within five years. Tesla is currently trading in the $900s after hitting a high point of about $1,200 in November 2021.

ARK sold off some of its Tesla holdings in 2021, but that was likely a profit-taking measure rather than an outlook change.

2. Trimble. Trimble is an industrial technology company that supports several industries, including government, construction, infrastructure, and transportation.

Among other things, Trimble develops “extended reality” solutions for the construction industry. One solution allows engineers to view designs in real-world environments holographically. The high-level outcomes are quicker, design decisions are better, and there are fewer costly surprises in the construction phase.

The company fits into Wood's wheelhouse because its technology innovates legacy processes (such as building design) across multiple industries.

3. Block. Block, formerly known as Square, is a leader in digital payments. Block is known for reinventing merchant services so businesses of any size can accept non-cash payments. Block also owns Cash App, a peer-to-peer payment app that supports stock and Bitcoin (CRYPTO:BTC) investing.

Block remained one of ARK's largest positions even after the fund culled shares in the second half of 2021. The reduction was an opportunity to realize profits; Block's stock price had just jumped after a good earnings report.

4. Coinbase. Coinbase is a cryptocurrency exchange that's geared for novice crypto investors. ARK has been a Coinbase shareholder since the company went public in April 2021.

Wood has been outspoken about the promising future of crypto. In early 2022, an ARK analyst predicted Bitcoin's price would rise to almost $1 million within eight years. Given Coinbase's position as an easy entry point for new crypto investors, the digital exchange will benefit if ARK's prediction proves true.

5. Exact Sciences. Exact Sciences makes cancer diagnostics tools, including the at-home colon cancer screener Cologuard and CancerSEEK, a multi-cancer test. Early detection is critical to treating colon and other cancers, so these products can save lives and lower healthcare costs.

Exact Sciences estimates its addressable market at $58 billion.

Investments Cathie Wood avoids

Disruptive innovation is a narrow focus. That leaves a lot of stocks off the table for Wood, including popular safe-haven securities. You generally won't find consumer staples, premium dividend payers, and other low-volatility picks in ARK funds. Nor will you find value stocks, the bread and butter of Warren Buffett's portfolio.

Wood doesn't like meme stocks either, even though Wood herself is a popular subject on Reddit. GameStop (NYSE:GME), AMC (NYSE:AMC), Nokia (NYSE:NOK), and the like may be shaking up the investment community, but they are not innovating to Wood’s standards.

ARK funds also have little overlap with the S&P 500. Many of the largest public companies in the U.S. don't meet ARK's growth potential or innovation requirements. There are exceptions, though. As previously noted, ARK has had a sizable position in Tesla, along with exposure to Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), and Disney (NYSE:DIS).

Disruptive innovation for growth (and volatility)

Wood specializes in picking high-growth stocks that deliver jaw-dropping returns. She's proven her skill at beating the market, but it hasn't been a smooth ride. After earning triple-digit returns in 2020, ARK ETFs have struggled. The ARK Innovation ETF (NYSEMKT:ARKK), for example, is trading more than 50% below its February 2021 high.

Through this rough patch, Wood is standing by her strategy and reiterating her five-year timeline. The performance of ARK ETFs is a reminder to investors that there's no achieving high growth without some volatility along the way.