For those bearish on ARK Invest’s innovation-driven stock picks, there might soon be a new ETF that allows investors to bet against them.
Tuttle Capital Management, a small fund company with 10 ETFs and $228 million under management, has filed to launch the Short ARKK ETF under the ticker SARK. The fund would seek to track the inverse performance of the $23 billion ARK Innovation ETF (ticker: ARKK) through swaps contracts, according to a filing with the Securities and Exchange Commission.
Inverse ETFs have been around a long time, but most bet against a broad-market index or particular sector, rather than an actively managed portfolio like ARK’s. “As far as I’m aware, it’s unprecedented,” said Ben Johnson, director of global exchange-traded fund research for Morningstar.
It’s not the first time that Wall Street broke norms in order to tap on investors’ surging interest—whether bullish or bearish—in ARK and its stock-picking CEO, Cathie Wood.
Earlier this year, big investment banks started issuing structured notes tied to the firm’s actively managed ETFs. These debt securities involve complicated derivatives trades that promise some participation in the underlying assets’ gains but a certain level of downside protection.They are traditionally tied to single stocks or indexes like the S&P 500.
The filing for the Short ARKK ETF came as ARK funds are struggling to repeat their spectacular performance of last year. The ARK Innovation ETF, for example, gained roughly 150% in 2020 as one of the top-performing ETFs of the year. Year to date, it’s down 4.4%,after plunging 24% from the February peak.
Some investors think Wood’s heavy bets on highflying tech stockslike Tesla(TSLA) and Square(SQ) have made the fund’s portfolio too expensive and risky, which has weighed on its performance this year as investors favored the cheaper cyclical stocks that could benefit from the postpandemic recovery.
ARK did not respond to a request for comment.
Even for investors skeptical about Wood’s penchant for innovation stocks, though, buying an anti-ARK ETF might not be the smartest thing to do. Anyone that doesn’t like the ARK funds can simply not buy them. Shorting them could bring more risks than the potential rewards.
“The odds you’re going to profit from those bearish beliefs by short selling these funds are pretty small,” said Morningstar’s Johnson, “The upside is limited, the best you can get is a 100% return on your investment, and that’s assuming ARK will run its portfolios to the ground, which isn’t going to happen. On the other hand, the worst that could happen is that if ARK has another year like they did last year. You’ll get absolutely torched.”
Still, ARK doubters already are borrowing shares and selling the short themselves. According to data from FactSet, short interest in the ARK Innovation ETF has increased to nearly 10% of its total floating shares, up from 2% at the beginning of the year.
Many noninstitutional investors don’t have the capability or channel to short stocks or ETFs themselves, and Tuttle Capital Management sees an opportunity here. “Clearly there is an increased appetite to short unprofitable tech,” Matt Tuttle, the firm’s chief executive officer, told Barron’s in an email, “The goal there was to create tools for investors to express a view.”
The newly filed Short ARKK ETF plans to charge a 0.75% operating expense, mirroring the expense ratio of the ARK Innovation ETF. Compared to a simple inverse fund tracking a stock index or commodity, the fund might have a harder time returning the exact inverse of ARK Innovation’s performance, said Johnson:“You are betting against a moving target, and in theory, there’s going to be some degree of slippage when you try to do that.”
To be sure, the Short ARKK ETF is still in filing. There is a chance that the SEC might not approve it, given that the fund is the first of its kind.