Short-sellers have ramped up bets against Catherine Wood’s flagship Ark Innovation ETF ARKK-A as belief in its strategy shows signs of faltering.
A record 12 per cent of the exchange-traded fund’s (ETF) shares are being shorted by investors betting on a decline – a bet worth more than US$2.7-billion on Aug. 3, according to S3 Partners LLC, a specialist data provider. A year ago the tally stood at just US$40-million.
The rising skepticism, along with the emergence of a new ETF designed to take the opposite side of all Ms. Wood’s bets reflects doubts in the tech-heavy strategy that worked so well for Ark Innovation ETF as the markets bounced back from the shock of COVID-19 lockdowns last year.
“Some investors who have been waiting in 2021 for the fund to repeat its success in 2020 have lost faith and pulled out,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research in New York.
In 2020, Ark Innovation ETF delivered returns for investors of almost 150 per cent, helping to make it, and Ms. Wood, some of the biggest names in U.S. fund management.
Ms. Wood is known for bold bets and striking pronouncements on what she sees as rosy prospects for assets, including electric carmaker Tesla Inc.’s TSLA-Q shares and bitcoin prices.
In the opening months of this year, betting against the ETF was painful; short-sellers were down US$38-million in mark-to-market losses, or 2.26 per cent, from January to June, says Ihor Dusaniwsky, head of predictive analytics at S3 Partners in Smithtown, N.Y. But a sharp reversal in their fortunes now means Ark Innovation ETF shorts are up US$137-million, or 7.8 per cent, so far this year.
“With the [Ark Innovation ETF] short trade becoming profitable, we saw US$369-million of additional short-selling over the past 30 days,” Mr. Dusaniwsky says.
Ark Investment Management LLC declined to comment.
Ark Innovation ETF recorded its largest monthly outflow of net money for the year in July, as the ETF – dominated by holdings in Tesla, Roku Inc. ROKU-Q, the television-streaming platform, Teladoc Health Inc. TDOC-N, a digital health care service, Shopify Inc. SHOP-T, an e-commerce platform for small businesses, and Zoom Video Communications Inc. ZM-Q – declined by 8.2 per cent.
In fact, the ETF recorded net outflows of US$944-million last month, according to ETF.com, and the value of the fund is down more than 1 per cent in 2021.
In part, this is down to the relative resurgence of stocks in other sectors beyond technology, such as financials and energy.
“Some investors believe there is no further upside in the tech sector as it is expensive, may be in bubble territory, and other parts of the U.S. economy are likely to do better as the world reopens,” says Deborah Fuhr, managing partner and founder of ETFGI LLP, a consultancy. She adds that many traders have viewed the fund’s holdings in Tesla as “risky and expensive.”
Ark Innovation ETF can still draw a crowd; it has attracted US$6.7-billion of net inflows this year, according to ETF.com and now has US$22.45-billion in total assets under management. But that total has dropped from US$25.52-billion at the end of June.
Ark Innovation ETF soared at the start of the year as investors pumped more than US$5-billion into the ETF during the first two months of 2021. After a steep slide into March, it plumbed its lowest price for the year in mid-May, but a strong rally petered out at end of June.
Some doubters of the ETF have gone a step further. Regulatory filings show Tuttle Capital Management LLC, a Greenwich, Conn.-based provider of thematic and actively managed ETFs, has forged plans to launch a Short ARKK ETF, known as SARK. If approved, it will seek to provide the inverse of Ark Innovation ETF’s performance, betting against all the stocks the ETF’s fund manager buys.
However, Ms. Fuhr says the increased interest in short-selling the ETF could be misguided.
“Going short is a risky trade and the likelihood of making a lot of money is very small,” she says.
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