Red-hot exchange-traded funds from ARK Invest suffered a major setback this week.
In its worst week since last March, the firm’s flagship product, the $24 billion
exchange-traded fund (ticker: ARKK) tumbled 14.6%, as some of its top holdings—including
(ROKU)—fell sharply. The
meanwhile, fell 2.4%.
An improving economic outlook—which could lead to higher prices and higher interest rates—sent stocks lower this week, especially those of the highest-flying technology companies. At its peak on Feb. 12, ARK Innovation was up 26% for 2021, versus the S&P’s 5%. By the end of the month, ARK Innovation was up 4.7% and the S&P was up 1.5%. Investors yanked more than $1 billion out of ARK ETFs on Wednesday and Thursday, the largest net outflows in the firm’s seven-year history, and a sharp reversal from weeks prior. The funds have seen $16 billion in inflows so far this year.
As the Wall Street adage goes, when the ducks are quacking, feed the ducks. Fund companies took note of ARK’s inflows, and have been rolling out similarly specialized, ARK-like funds that focus on innovative and disruptive companies.
Cathie Wood, the economist who founded ARK Investment Management, is a thoughtful observer and excellent stock-picker. But ARK’s phenomenal rise is due to more than skill: Five of ARK’s seven ETFs returned more than 100% last year, an historical anomaly. Returns like this attract hot money from folks who rush into a “sure thing,” and sell as soon as shares falter—hence the $1 billion in outflows in two days.
Fidelity rolled out a suite of six actively managed disruption funds last April. Five are focused on specific areas such as automation, communications, finance, medicine, and technology; one,
(FGDFX), encompasses all five themes. All together, the suite has $558 million in assets; year-to-date, they’re up 3.3% on average.
Its disruption funds employ a new, time-based fee model. Annual fees start at 1%, fall to 0.75% after one year, and 0.5% after another two years. “The overall objective is to incentivize investors for long-term investing,” says Chris Peixotto, vice president of Fidelity’s investment product group. This makes particular sense for disruptive funds, which can be volatile and take years to play out.
The $421 million
Goldman Sachs Innovate Equity
ETF (GINN), launched in November, tracks an index of nearly 500 stocks—about 10 times more than ARK Innovation. That lack of concentration, and lack of active management, makes this ETF look a lot more like the broad market, with top holdings such as
(FB), none of which are in the ARK Innovation ETF. The Goldman Innovate ETF has returned 4.8% so far this year.
The $181 million
Direxion Moonshot Innovators ETF
(MOON), also launched in November, is probably the most ARK-like fund. It holds just 50 stocks, but unlike most of ARK’s ETFs, it is not actively managed. Instead, it tracks an index that uses natural-language processing to review company filings, identify innovation-related remarks, and selects early-stage disruptive firms. The fund is up 34% this year.
The $1.1 billion
Invesco NASDAQ Next Gen 100
ETF (QQQJ), a mid-cap version of the popular
Invesco QQQ Trust
(QQQ), was a big hit when it launched in October. It tracks the 101st to the 200th-largest Nasdaq-listed “up-and-coming” companies, mostly in tech and other innovation-driven industries. Many of today’s mega names were once in the Next Gen basket. The fund is up 7.1% this year.
All these innovation funds have fallen in the past week, but none have seen the kind of outflows ARK did. Perhaps being the first mover isn’t always an advantage.
Write to Evie Liu at email@example.com
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