Two exchange traded funds (ETFs) launched recently seeking to make a profit from Cathie Wood’s tech funds.
The Tuttle Capital Short Innovation ETF (SARK) has drawn huge attention by betting against the star fund manager’s flagship ARK Innovation ETF’s losses during the post-pandemic tech crash. Conversely, the fledgling AXS 2X Innovation (TARK) ETF is seeking gains from ARK’s recovery, which it hopes will happen in the next quarter.
Wall Street’s latest gyrations, which has seen tech stocks get hit, have prompted a slew of short bets against Wood’s flagship ARKK vehicle and her other exchange traded funds betting on disruptive innovation. As the Fed’s pivot toward rate hikes sank Wall Street further throughout last week, ARKK had accumulated a 53% decline in the past year while SARK had soared 76.6%.
Launched in November, SARK seeks returns by betting against ARKK’s daily swings through swap contracts. It has won many fans in the tech crash, with investors pouring roughly $350 million by press time.
“We are providing a tool that lets investors do lots of things, like betting against the current economy where we know the Fed will raise rates. In that type of environment, tech firms cannot do very well,” says Tuttle, adding that retail investors, such as those holding IRA retirement accounts, are unable to short ARKK so his fund gives them the ability to make contrarian bets.
With a 0.75% expense ratio (matching ARKK’s), SARK will continue to gain from ARKK’s losses until there is a rebound, says Tuttle, adding that such an event won’t immediately trigger the fund’s closure.
“This is just a tool,” he says. “If unprofitable tech continues to lose, then we win. There are other ETFs doing similar things…this is not an actively managed fund” requiring managers to meet certain targets or face redemptions. So while the herd moves against ARK, Tuttle will make money – and lose when it moves in the opposite direction and/or a new cycle begins.
As some of the companies in Wood’s funds, including Tesla (TSLA), Zoom (ZM) or Teladoc (TDOC), come under pressure, Tuttle is considering “lots of other things” including the possibility of other contrarian funds “so stay tuned,” he said. Despite its impressive performance, Tuttle concedes rivals wagering on a bullish strategy could also do well, if they time the market right.
That includes SARK, of course, which is targeting a 200% return on ARKK’s future daily movements and will launch in approximately 75 days, according to an SEC filing.
“They could have a lot of success,” he says. “This is another tool for investors. Who knows where the market will be in 75 days but at some point, ARKK will have to rise again.”
Jane Edmondson, who heads ETF indexing firm EQM, says SARK will do well once tech makes a comeback, something that could happen sooner than later. “We need to have interest rates and inflation but tech disruption is real and not going away anytime soon,” she notes. “The current selloff is creating an opportunity for peak valuations to come back to earth, especially for overleveraged firms.”
That said, top firms such as Apple (AAPL), Google (GOOGL) or Tesla “have lots of cash so increasing rates is not a big deal for them,” she adds, contrary to smaller or more speculative firms which financing costs will rise as the Fed tightens monetary policy. The post-Covid economic recovery is also just getting started and this, coupled with a slew of strong earnings reports set to hit the market, should also help high-growth names recover.
Others are even more sanguine, noting that equities could stage a V-shaped turnaround next month as tech is nearing a bottom.
“The faster the decline, the faster the recovery,” Fundstrat’s Managing Partner Tom Lee said in a note this week. “We expect a violent bounce to ensue, once stocks have bottomed. And it seems like our strategists are seeing this incremental possibility.”
Meanwhile, Todd Rosenbluth, who heads ETF research at CFRA, says new copycats looking to strike riches when ARK funds falter, are unlikely to hit the market.
“There aren’t other active funds with similar assets and following as ARK’s [that could be mirrored] or people willing to take contrarian positions,” he notes. “There are also lots of other actively managed ETFs but they have more traditional core strategies and aren’t as concentrated [on tech innovation]. And even though the fund managers are known, they are not Cathie Wood.”
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