Cathie Wood's Ark Innovation becomes largest actively managed ETF, amid 170% 2020 return

Published Wed, Dec 23 20209:11 AM ESTUpdated Wed, Dec 23 202010:49 AM EST

(This story is for CNBC Pro subscribers only.) The manager of the largest actively managed ETF has a message for investors: "Get on the right side of change and stay on the right side of change because it has hit escape velocity in the aftermath of the coronavirus." Ark Invest's founder and CEO Cathie Wood, a longtime Tesla bull, manages the Ark Innovation Fund , which has seen its assets under management balloon to $17 billion in 2020, according to FactSet. With more than $8 billion of inflows this year, the fund has become the largest actively managed ETF. The eye-popping flows into the fund are more like the kind one would see to an index fund or popular passive ETF. Just five other equity ETFs had more inflows than Ark's this year, including the giant passive tech bellwether Invesco QQQ Trust . Just in December, Ark Innovation has added $2.5 billion in assets. ARK Innovation — the firm's flagship fund that trades on the New York Stock Exchange under ticker ARKK — has returned more than 170% this year amid the Covid-19 pandemic, thanks to the remarkable gains from Tesla, Square, Teladoc and many other winning constituents. The fund centers around ″disruptive innovation," or technology that will change the way the world works. The ARKK focuses on industrial innovation, molecular biology and web development. "Innovation as the answer to a lot of problems and innovation is still the answer to a lot of problems because we're not out of the coronavirus yet," Wood said. "The coronavirus has created a tremendous number of problems in the global economy and I think innovation is helping to solve or ameliorate them." With a triple-digit rally in 2020, Wood reminds her investors that Ark is investing for the long term. She said the firm's five-year horizon sees a compound annual rate of return of more than 20% per year, if the fund hits its expected targets. Wood attributes some of the massive inflows to investors tuning into Ark's research during the coronavirus turmoil. Wood published YouTube videos every Friday about how innovation was helping to solve the problems during the pandemic and how Ark was differentiating the economic shock of the pandemic from a traditional recession. "We were comparing it more to the shocks that we felt in 1987 when portfolio insurance failed ... and after the 9/11 terrorist attack. What happened in each of those periods was the forces or the trends in motion before the shock remained in motion after the shock," Wood explained. "In '87 we were in a very strong market, very strong economy, we just continued. In 2001 we're in the tech and telecom bust and after the shock was relieved we continued into the tech and telecom bust." "This time around we believed we were in a very strong economy before the coronavirus and that it would resolve to turning back into a strong economy and strong market, and those two things proved out," Wood added. Don't confuse Ark Innovation with tech Some investors consider Ark Invest's funds synonymous with high growth technology picks. However, the fourth quarter has debunked this theory. The final quarter of 2020 has seen a rebound in the most beaten-down stocks of the year. Energy, financials and industrials are the top performers up about 37% , 23% and 16%, respectively. This gave the major rally in tech stocks a breather, but Ark Innovation didn't take part in the pause. Wood said she was shocked to see the Ark Innovation fund outperform during this period, gaining about 47% in the past three months. "What seems to be happening is both cyclicals and innovation have been doing very well at the same time," said Wood. "More and more investors are starting to understand that the innovation that has just hit escape velocity because of the coronavirus that it is going to be very damaging to many value oriented companies. I think you see a lot more picking and choosing in the value space focusing on the most cyclical stocks without the risk of being disintermediated." To be sure, Wood said she would expect a correction for the fund at anytime. "We are talking about equity markets, and they do correct," Wood said. Tesla #1 holding The Ark Innovation ETF has returned 37% annually since its inception in October 2014. The fund's largest holding is in electric car maker Tesla , accounting for more than 10%. Wood is a long-time Tesla bull and has an eye-popping $7,000 per share price target on the stock for the end of 2024 . Wood's bull case sees the carmaker topping $15,000 per share over that period. Shares of Tesla, which has its first day of trading as a member of the S & P 500 on Monday, are up more than 665% in 2020. "We're seeing an accelerate move in electrification in transportation around the world, and I think that the big surprise to us this year is that Tesla has held its market share," said Wood. Tesla has about 25% of the the EV market share. Ark Invest is encouraging Tesla to start a ride-hailing business to compete against Uber and Lyft because it will help catapult the carmaker into the autonomous world faster than would otherwise be the case. "It's going to have to develop mapping and routing systems, payment ecosystems in order to move into the autonomous world, so why not get it going by legging into the ride-hailing market," Wood said. "If they do that, then we think it will increase they're cash flow dynamic." Payments giant Square is another top holding in the fund. Shares of Square are up nearly 286% in 2020 as the pandemic alters how money is transferred. "Ultimately it's going to disintermediate banks and take away a lot of bank business," said Wood. I think a lot of tech companies are starting to understand that." Crispr Therapeutics and Invitae are also top holdings. Shares of Invitae, a molecular diagnostic testing company, are up more than 230% this year. "Invitae is collecting mountains of data that are helping it delineate or identify mutations in peoples gnomes, their gnome profile, and it's pairing those mutations with the right therapies," said Wood. "We think this is going to be a winner-take-most category." Pandemic winners Roku and Teladoc Health , which are up 165% and 146% this year, respectively, are also top holdings. Slack is another one, up 90% in 2020 as work from home spurred demand for the messaging platform. Proto Labs , 2U and LendingTree are also top holdings. The fund has a 0.75% expense ratio.

A Tesla logo is pictured during the Brussels Motor Show on January 9, 2020 in Brussels .

Kenzo Tribouillard | AFP | Getty Images

(This story is for CNBC Pro subscribers only.)

The manager of the largest actively managed ETF has a message for investors: "Get on the right side of change and stay on the right side of change because it has hit escape velocity in the aftermath of the coronavirus."

Ark Invest's founder and CEO Cathie Wood, a longtime Tesla bull, manages the Ark Innovation Fund, which has seen its assets under management balloon to $17 billion in 2020, according to FactSet.