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While the S&P 500 and private market are skyrocketing, almost all the Ark ETFs have been hit significantly in 2021. Cathie has never seen anything even remotely close to that and is pointing towards the indexes as a major bubble. She has even gone as far as to say that she is a deep value fund manager, because the prices in innovation are unbelievably cheap, while index funds are about to crash dramatically. This video will go in-depth on why Cathie believes index funds are undergoing one of the largest bubbles in history.
Almost everyone sees index funds as the holy grail of investing. The majority of active fund managers struggle to outperform the S&P 500 even though index funds charge a minuscule amount of fees. Warren Buffett has called index funds the best thing to own for the majority of people. This all sounds great, but the popularity of index funds may be fueling up a bubble. ETFs recently posted a record of inflows of $1 trillion in 2021. That is a substantial amount, but the fact that the inflows have been so immense could be a self-fulfilling prophecy. The S&P 500 is simply a bundle of stocks that investment companies like Vanguard closely track to create an ETF. When money flows into the S&P 500, this inflates the valuations of the companies within the S&P over time, therefore creating returns by itself. Essentially, perhaps one of the reasons why fund managers struggle to beat the S&P is because the increasing inflows are inflating the S&P’s returns. This is similar to Ark Invest, because if investors sell the Ark ETF, then the stocks inside the ETF will sell off. We can see this with ARKK’s assets under management, which decreased from $22 billion in November to just $16 billion today. There are certainly several factors that go into the valuations, but regardless of that analysis, it is quite clear that valuations are at all-time highs. I’m sure those of you following the market have seen the Buffett indicator over and over again. The Buffett indicator is a ratio that takes the total market value of the US stock market and divides it by the annualized US GDP. This ratio is currently at 213%, which is significantly higher than the average. Even when comparing the ratio to the long-term trend line shown on the screen, the Buffett indicator would still be considered overvalued. As you can see in this graph, the Buffett indicator is over 2 standard deviations above the trend line. This means that in this dataset, we are only at these valuations 2% of the time. Some may attribute these equity valuations to inflation, but a deeper analysis shows that the correlation is not positive and may actually be negative. Inflation soared in the late 1970s and early 1980s to rates above 10% at one point. This period is called the Great Inflation for obvious reasons. During this time, the Buffett indicator was actually at all-time lows. If we return back to the graph with standard deviations, you can see how the late 1970s and early 1980s were actually the low points within this graph. Therefore, it would be difficult to attribute rising valuations to inflation. The S&P 500’s PE ratio is also near historical highs at roughly 29, and the S&P Shiller PE Ratio, which adjusts the PE ratio for inflation, is at 39. It may be strange to see Cathie Wood say that index funds are in a bubble, especially because many see her as the poster child for the modern tech bubble. However, her argument makes sense given that so many investors and fund managers are blindly investing in the S&P for a quote-unquote “guaranteed 10% annual return over time.” Cathie believes that the S&P will be seen as much riskier than anticipated, especially as companies in the S&P get disrupted.
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