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An increasing appetite for exchange-traded funds (ETFs) was evident on Wall Street in 2021. Net inflows into US-listed ETFs hit a record $910 billion, according to data from research and analytics firm CFRA.
However, not every ETF was a winner. After a remarkably strong performance in 2020, widely-followed fund manager Cathie Wood’s flagship fund, the ARK Innovation ETF (NYSE:ARKK), was among the worst-performing funds of 2021. And the downtrend has extended into 2022, as it is already down close to 20% year-to-date (YTD).
ARKK was not the only Cathie Wood fund that disappointed its investors in the past 12 months. The ARK Next Generation Internet ETF (NYSE:ARKW) and the ARK Genomic Revolution ETF (NYSE:ARKG) also underperformed broader markets.
Meanwhile, in early November 2021, Tuttle Capital Management (TCM), which offers thematic ETFs, launched the Tuttle Capital Short Innovation ETF (NASDAQ:SARK). The investment objective of SARK is to take a daily bet against holdings in the ARKK fund. Understandably, the ticker SARK implies “short ARK.”
Tuttle’s CEO Matthew Tuttle has not been shy to express his views, especially on popular ETFs and special purpose acquisition companies (SPACs). He does not regard it as an appropriate buy-and-hold investment, mostly due to the expensive valuation levels of most shares in ARKK.
Yet Cathie Wood doesn’t seem concerned about such an inverse play against her fund. She commented in a November interview with Bloomberg:
“This is what makes a market, right? I never worry about anyone shorting the stocks underlying Ark or with this new ETF.”
Nonetheless, uncertainties regarding possible moves by the Fed and overstretched valuations make the current market scene a difficult one to navigate for many popular funds and retail investors.
So today’s article examines both ARKK and SARK so that readers can better appreciate which side of the equation they would like to be on at this point. Let’s take a closer look:
Cathie Wood and her team focus on disruptive innovation, such as artificial intelligence (AI), automation, robotics, genomic revolution, and blockchain technologies. Therefore, the ARK Innovation ETF invests in businesses at the center of these trends. The fund started trading in late October 2014.
This actively managed ETF typically holds 35-55 stocks. ARKK, which currently has 43 holdings, is weighted toward cloud computing (13.0%), digital media (11.9%), e-commerce (10.9%), gene therapy (6.0%), and big data & machine learning (5.6%).
Over 90% of the businesses come from North America. The top ten stocks comprise over 55% of the portfolio of stocks. Put another way, it is a heavily concentrated fund.
Tesla (NASDAQ:TSLA) leads the names on the roster, accounting for 8.3% of the portfolio. Next is Zoom Video Communications (NASDAQ:ZM), followed by Teladoc Health (NYSE:TDOC), Roku (NASDAQ:ROKU), Coinbase Global (NASDAQ:COIN), and Exact Sciences (NASDAQ:EXAS).
In mid-February 2021, ARKK hit $159.70, a record high. Since then it has lost about 50%. In fact, in January this year, the ETF declined over 19.9% and hit a 52-week low yesterday. By comparison, so far in 2022, the S&P 500 and the NASDAQ 100 index have declined 3.7% and 6.5%, respectively.
ARKK remains a powerhouse ETF with almost $16.1 billion net assets despite the significant price drop. Readers who are confident in the fund’s long-term growth strategy could see this decline as an opportunity to buy ARKK.
The actively managed SARK aims to replicate the inverse (-1x) of the daily returns of the ARKK ETF. Therefore, it uses derivative products, such as swap contracts, on a single-day basis. Like other inverse ETFs, SARK is not necessarily an appropriate fund for longer holding periods.
SARK started trading on Nov. 9, 2021, at an opening price of $29.94. It was launched in part based on the argument that ARKK was significantly overvalued, holding stocks without enough (or any) profits to justify expensive valuation levels. The ETF currently has $89.1 million under management.
Since the start of the year, SARK is up close to 22% and has also returned about 48% since inception. Readers who are experienced with inverse ETFs could consider setting up daily trades in SARK as a way to protect potential long-term gains in their ARKK investment.
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