ARK Funds Leaking Assets

December 03, 2021

In 2020, ARK ETFs saw an incredible flow of assets, taking in more than $20 billion over the course of the year. The issuer, known for its focus on disruptive innovation, saw the performance of its suite of ETFs skyrocket as tech names soared in the turmoil of the pandemic.

The ARK Innovation ETF (ARKK) saw the largest haul, gaining $9.5 billion in assets in 2020. Four other ETFs from ARK also each gained over $1 billion in assets over the course of the year.

 

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ARK seemed poised for another blockbuster year of asset growth, with the issuer’s ETFs taking in an additional $16.5 billion in assets during the first two months of 2021. However, assets have been slowly leaking out of ARK ever since.

In fact, if it weren’t for the first six weeks of the year, the five largest funds would all be in negative flow territory year-to-date.

 

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Courtesy of FactSet

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Pandemic Boosted ARK Holdings

The impact of the COVID-19 pandemic on consumer behavior and the equity markets served to juice the returns of stocks held within ARK’s ETFs. Among the suite of funds, the ARK Genomic Revolution ETF (ARKG) had the highest return, gaining 157.4% in 2020.

 

 

Even the ARK Autonomous Technology & Robotics ETF (ARKQ), which returned 107.2% for the year, vastly outperformed other tech-focused ETFs. The Invesco QQQ Trust (QQQ) rose 48.6% for the year, still impressive, but paling in comparison to any of the ARK funds.

While active management offers potential for outperformance of index-tracking ETFs, even the most successful active funds won’t outperform year after year. And that is proving to be the case this year for ARK’s various ETFs.

 

 

ARKG, which had the highest return of the lot in 2020, is down more than 35% this year. All except for ARKQ have notched negative returns for the year when broad market indices are up over 20%.

Time will tell whether these ETFs will see another period of outperformance in the future. But some data suggests that active management is not likely to outperform over a full market cycle.

Active Likely To Underperform

S&P Dow Jones Indices releases SPIVA (which stands for S&P Indices Versus Active) data on an annual basis, which shows how successful active management has been in beating the index over various time periods.

And for most asset classes, the data suggests that active management underperforms the benchmark, especially over longer time periods.

 

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Some managers do pull it off though. And “full market cycle” is the key term when thinking about assessing active management, meaning judging ARK’s performance in 2021 alone isn’t appropriate. Over the longer term, the funds are still vastly outperforming the SPDR S&P 500 ETF Trust (SPY).

 

 

Over the trailing three years, ARK funds have gained 109%-180%. SPY rose by 73% over the same time frame. But the tech-heavy QQQ gained 135% over that period, beating ARKG and ARKF.

Lessons For Investors

Some investors who allocated to these ETFs in early 2021 are learning a hard lesson about performance-chasing. Piling into a fund after a strong period of outperformance is potentially the worst time to buy in.

And for those with strong convictions that ARK’s stock selection process is likely to identify winners in the long run, current performance should be viewed as a buying opportunity.

Though ARK remains near the top of the league table when it comes to ETF assets, currently managing about $36 billion, flows since February show that some investors are doing the opposite, choosing to jump ship for now.

For those who are still interested, one way to make ARK’s choppy performance easier to stomach would be to use a core-satellite strategy. Pairing active managers with vanilla index-tracking allows an investor to have exposure to highly differentiated or active funds while smoothing out some of the volatility.

Contact Jessica Ferringer at [email protected] or follow her on Twitter

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