McCreath: High correlation between Ark Innovation and unprofitable tech stocks
The old cliché that there is no such thing as bad publicity is proving true in the market for exchange-traded funds. Here, products are abundant but attention and liquidity are a scarcity, especially for funds that aren’t cheap and are serving up some kind of “active” strategy. So anything (within reason) that can bring attention and trading volume to an ETF is generally a good thing for its long-term staying power.
And this is exactly what a proposed new ETF designed to bet directly against Cathie Wood’s popular, successful and controversial flagship Ark Innovation ETF would do. The Short ARKK ETF is good for both the Cathie Wood haters and Cathie Wood herself.
A quick look at Twitter reveals no shortage of those taking shots at ARK’s strategy, which leans toward bulking up on Tesla Inc., Zoom Video Communications Inc., Coinbase Global Inc. and other high-flying technology shares. There’s deep resentment over the fact that her returns have been so good (greater than 40 per cent over the last one-, three- and five-year periods) and that the Ark family of funds were able to attract US$35 billion in new cash over the past two years when all other funds that pick stocks rather than rely on tracking some index lost a combined US$808 billion over the same stretch.
Although ARK critics can bet against Cathie Wood or any of her ETFs by using derivatives or shorting the funds, that can be a hassle and costly. The current cost to borrow ARK shares is about five per cent a year, according to IHS market data. The new ARKK ETF would make it easier and cheaper to take an opposing view – just buy the shares! But even beyond satiating those with “ARK Derangement Syndrome,” the new ETF might appeal to fundamentally-driven investors who feel as if Wood’s fund is due for a correction, or that stocks in general are overvalued or that they are vulnerable to rising interest rates. Opposing views are what makes a market.
The new ARKK ETF would also be good for ARK because it would bring interest and trading volume to the ARK ecosystem. Volume can’t be acquired or bought like assets -- it can only happen organically via supply and demand. But once it happens, it can act like a moat around an ETF, giving it longevity and pricing power, meaning less pressure to lower fees. It’s the moment when an ETF becomes both a fund and a futures contract serving both investors and traders. Just look at the popular SPDR S&P 500 and iShares MSCI Emerging Markets ETFs, both of which have been undercut on fees by rivals for a decade but still maintain a large audience because of their liquidity and surrounding ecosystem. Thus, the more people betting on ARK to go up – or down - and the more volume swirling around the fund, the better it is for ARK long-term.
Not that ARK needs that much help in the volume and attention department. The ARK ETFs see trading volume of about US$30 billion a month, which is similar to Netflix Inc. In addition, there is a growing options market tied to ARK’s ETFs, helping the firm attract institutional investors. So it’s only natural that there’s now a short ARK ETF. Some banks are even offering custom structured notes linked to the flagship ARK ETF. The added volume and attention the Short ARKK ETF would being will only add to ARK’s staying power.
The changing nature of the ETF industry should also benefit ARK and Cathie Wood. Given that the core of most investors’ portfolios is in some broad index fund, they are seeking something very different to layer on top. This is why ARK, certain “themes” and cryptocurrencies are so popular and (somewhat) resilient to selloffs. The money flow data show that the cash pouring into funds today looks something like a barbell, with about 75 per cent of the inflows go to boring but dirt-cheap index-like funds and 25 per cent goes to “shiny objects,” or funds with concentrated portfolios. This is very different from decades past, when an active fund was likely a core holding. So when its returns started to lag, investors would got nervous and flee. Many investors today view ARK through this 1990s lens and that has proven to be a mistake.
This is why investors in ARK are much “stickier” or loyal than many people think. With near-free vanilla index funds making up the core of portfolios, investors can afford to be more patient and tolerant with drawdowns in the spicy stuff. This would help explain why ARK has seen virtually no net outflows in either of its 30 per cent or so drawdowns.
So in an ironic twist, legendary index fund pioneer Jack Bogle helped create the lane that Cathie Wood now thrives in. Her brand of active is much better suited for the 21st century, or rather the Vanguard-ian future. And the fact that traders can now bet against it only adds to that staying power.