Cathie Wood has a warning about traditional growth stocks

Published Thu, Sep 23 20219:42 AM EDTUpdated Thu, Sep 23 202110:14 AM EDT

Innovation investor Cathie Wood implied she might rather choose to own a government bond yielding near 1% over some of the U.S.' largest market-cap companies over the next decade. Wood was asked at the Morningstar Investment Conference on Wednesday if she would rather invest $1 million in U.S. 10-year Treasurys — which yield 1% to 2% annually — or a U.S. large cap index-based exchange-traded fund to hold for the next ten years. "I do really think the Treasury bond will do well and a lot of what people consider growth stocks right now will be surprisingly poor performing," said Wood, who felt "torn" by the question. The large-cap ETF that Wood was asked about would include mega-cap growth stocks like Apple , Amazon , Microsoft , Alphabet and Facebook . Plus, names like JPMorgan Chase , Johnson & Johnson , UnitedHealth and Visa . "I think the years ahead are going to be so confusing because of this dynamic of disruptive innovation and creative destruction which is not isolated to value stocks," Wood added. "There are so-called growth stocks out there that are going to be in harms way." Wood believes this disruption will lead to deflation once again, a phenomenon that could cause yields to continue trending lower from already historically low levels. The founder and CEO of Ark Invest has said that more than half of the S & P 500 could be full of "value traps," or companies that have leveraged up to buy back shares and pay dividends, instead of spending aggressively in research and development to stay on top. Ark's strategy focuses on disruptive innovation. These are companies that Wood and her team expects will change the world order. Some of her top holdings include Tesla , Teladoc , Zoom Video and Square . "The other side of [disruptive innovation] is creative destruction means that these companies that have leveraged up buyback shares, pay dividends and satisfy short-term oriented shareholders — which is what the tech and telecom and financial crisis caused — that those companies are going to be in a bad way and to service their debt, they'll have to sell their increasingly obsolete products at lower prices," Wood said. Wood made a name for herself after a banner year in 2020, when her fund returned nearly 150%. However, her flagship fund is down about 5% this year due to a harsh rotation to value stocks from growth names. The S & P 500 is up 17% in 2021. The iShares 20+ Year Treasury Bond fund , which owns government bonds with longer-dated maturities, is off by about 4% year to date. Deflation not inflation Wood also leaned toward owning bonds over the next decade because she thinks we are entering a deflationary period. Meanwhile, most of Wall Street has been panicked about inflation. "We think there's going to be a huge deflationary pull out there. We think the higher risk is deflation not inflation," she said. Wood believes consumers have spent the time since the start of the Covid-19 pandemic spending money on goods, since services were unavailable during the lockdowns. As millions of Americans become vaccinated, Wood said consumer spending will shift to the services sector, which represents two-thirds of all consumer goods. She said businesses are doubling and tripling their ordering right now to meet demand, at the same time the market will shift towards services. Companies will be stuck with too much inventory, forcing them to lower prices. Wood also expects deflation from innovation. Costs are coming down drastically as new technology changes the world order, said Wood. "This deflationary force is going to develop more momentum and we have deflation associated with each of the five major platforms, DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology," Wood said.

Cathie Wood, founder and CEO of ARK Investment Management LLC, speaks during the Skybridge Capital SALT New York 2021 conference in New York City, September 13, 2021.

Brendan McDermid | Reuters

Innovation investor Cathie Wood implied she might rather choose to own a government bond yielding near 1% over some of the U.S.' largest market-cap companies over the next decade.