'Massive Misallocation' Of Capital: Cathie Wood Joins Elon Musk To Find Fault With Passive Investment

Popular stock picker Cathie Wood, who runs Ark Investment Management, on Wednesday joined Tesla Inc TSLA CEO and billionaire entrepreneur Elon Musk to criticize passive funds and investments.

What Happened: Wood expressed her concerns about passive investments and said she believes history will view the accelerated shift toward passive funds during the last two decades as a massive misallocation of capital.

In my view, history will deem the accelerated shift toward passive funds during the last 20 years as a massive misallocation of capital.

— Cathie Wood (@CathieDWood) May 4, 2022

Wood replied to Musk's earlier tweet, in which he said passive funds had “gone too far” as a phenomenon and there should be a “shift back towards active investment.”

“Passive funds prevented many investors from enjoying a 400-fold appreciation in Tesla from a $1.6 billion market cap at its IPO in June 2010 to about $650 billion when it entered the S&P 500 ten years later in December 2020,” Wood said.

The 66-year-old investor said that the most broad-based passive funds are "short" disruptive innovations when the global economy is undergoing the largest technological transformation in history.

Musk, who is buying Twitter for $44 billion, also said the major problem with passive or index funds was that “decisions are being made on behalf of actual shareholders that are contrary to their interests."

Why It Matters: A fund manager for an actively managed fund is more involved in trying to outperform an index over time, unlike in passive investment funds where they aim to match and not beat the performance of an index.

A Tesla superbull, Wood’s firm buys and sells shares in innovation, disruptive technologies and other companies through six of its actively traded exchange funds.

Besides Tesla, Ark Invest counts Roku Inc ROKU, Zoom Video Communications Inc ZM, Coinbase Global Inc COIN and others among its top holdings in its flagship innovation exchange-traded fund.

Price Action: Tesla closed 4.77% higher at $952.6 on Wednesday.

Photo: Courtesy of Ark Investment