ARK’s Cathie Wood.
Courtesy of Ark
Despite some rough patches this year, ARK Invest founder and CEO Cathie Wood is preparing to launch a new exchange-traded fund.
ETF (ticker: CTRU) is set to start trading on Wednesday and will be Wood’s ninth ETF in total and second this year. The fund will tap into investors’ booming demand for products that meet higher environmental, social, and governance standards, especially when it comes to transparency in corporate behavior. The new ETF will have an expense ratio of 0.55%, cheaper than the 0.75% charged by most ARK funds.
But it’s questionable how much enthusiasm the new fund might get from investors.
To start with, unlike most ARK ETFs, the new fund won’t be actively managed and isn’t about innovative disrupters. Instead, it will track an index of the 100 most transparent companies measured by things like how companies disclose information in corporate documents and whether they have been involved in lawsuits. Industries with a negative impact on the well-being of people, such as alcohol, gambling, chemicals, and fossil fuels, will be excluded from the index.
All this makes the ARK Transparent ETF a lot like an ESG fund—with a heavy focus on corporate governance. The majority of the ESG funds on the market are broad-themed ones, where companies need to meet criteria for all three aspects: environmental, social and governance. While there are many environmentally focused green or clean-energy funds, social- or governance-focused ESG products are relatively rare.
The few around include the $279 million
SPDR SSGA Gender Diversity Index ETF
(SHE), the $153 million
Fidelity Women’s Leadership
fund (FWOMX), the $38 million
NAACP Minority Empowerment
ETF (NACP), and the $80 million
Adasina Social Justice All Cap Global ETF
(JSTC). But none has achieved quite the same level of success as the broad-based ESG funds like the $24.3 billion
iShares ESG Aware MSCI USA ETF
Still, ARK Transparent is quite different from most other governance-focused products because of the unique approach it’s taking, says Todd Rosenbluth, head of ETF and mutual fund research at CFRA. While financial metrics like earnings growth and valuation aren’t explicitly considered, the new fund still contains many disruptive companies with long-term growth prospects like many other ARK ETFs do, says Rosenbluth.
ARK Transparent’s underlying index had a nearly 42% weighting in tech stocks as of Sept. 30, compared with the
S&P 500 index
‘s 28%. Top holdings included cloud infrastructure provider
(DOCN) and software giant
(CRM). Some of ARK’s favorite stock picks, such as
Zoom Video Communications
(ZM), were also on the list. All 100 holdings are equally weighted at the quarterly rebalance.
The index also had heavier exposure to consumer discretionary and industrials, and less in healthcare and communication services. Financials, which make up 11% of the S&P 500, were reduced to just 2%, since banks are excluded from the index due to their lack of fiduciary behavior, poor data privacy, and high fees. Energy, utility, and real estate stocks were also nowhere to be found.
While industries like fossil fuel, alcohol, and gambling are typically excluded from most ESG funds, investors might find it unusual that banks and confectionery firms are also on ARK’s “black list.”
(JPM), the 10th-largest company in the S&P 500, is a top holding in many ESG funds, after all.
According to backtesting data, ARK Transparency’s underlying index gained an annualized 34.7% from Oct. 1, 2016, to Sept. 30, 2021, while the S&P 500 returned just 16.9%. But it’s hard to discern whether the outperformance comes from higher transparency standards of the selected companies, or simply the index’s tilt toward high-growth sectors.
A spokesperson for ARK didn’t immediately respond to a request for comment.
The timing of the new fund’s launch isn’t great. The ARK funds have been under pressure since falling from their February peaks. As of Tuesday’s close, all—except for the
ARK Autonomous Technology & Robotics ETF
(ARKQ)—are in negative territory for the year. The flagship
ARK Innovation ETF
(ARKK) is down by 20% year to date, and the
ARK Genomic Revolution ETF
(ARKG) has tumbled 31%. The S&P 500 has risen 25% during the same period.
Performance has been particularly terrible in the past month, as policy makers signaled a more hawkish monetary stance and potential raise in interest rates next year. Last week, ARK Innovation posted its worst week since February, tumbling nearly 13% to the lowest in more than a year. The fund has bounced back 7% this week.
ARK Invest’s last new fund, the
ARK Space Exploration & Innovation ETF
(ARKX), was launched in March near the peak of Wood’s popularity. It came out as an immediate hit and attracted more than $500 million new assets within just a week. With ARK funds’ lagging performance in recent months, however, Wood’s halo has surely faded some.
Already, some investors are jumping the ship. ARK ETFs have lost a total of $1.7 billion assets over the past six months. The Genomic Revolution fund saw more than $1 billion net outflows; and the Innovation fund, nearly $900 million. The youngest, the Space ETF, was the only one that had net inflows during the period.
Still, despite recent asset losses, ARK is one of the major fund issuers in the U.S., with nearly $33 billion in its current ETF lineup. “Products that have an ARK name are likely to get investor interest, because of the halo effect established by its 2020 performance,” says Rosenbluth, “There is a loyal investor base that has confidence in the products ARK brings forward.”
account has more than one million followers, more than
and Vanguard—two of the largest ETF companies in the U.S.—combined. But even for the loyal fans of Wood, the new ARK Transparent ETF might have one problem: It might be too similar to what they already own.
“If you already own the ARK Innovation, there is going to be some overlap in the new product,” says Rosenbluth.
Write to Evie Liu at firstname.lastname@example.org