ARK Capital ETFs
Image credit: Marco Verch

ARK Capital and the Rise of Themed ETFs: A Trend to Last?

Exchange-traded funds (ETFs) were once a bland investment product. Cathie Wood, of Ark Capital, and the recent rise of themed ETFs has changed that dynamic. ETFs are suddenly becoming a much more fashionable investment product. Some of the trendiest themed ETFs invest in space exploration, electric cars, and 3-D printing.

Cathie Wood is the founder and CEO of investment management firm ARK Capital. She has taken center stage in fueling the ETF success streak. ARK Investment Management LLC’s latest exchange-traded fund, specializing in space exploration, has attracted more than $500 million from investors. Known as ARK Space Exploration & Innovation ETF, it has set a record as one of the most successful fund launches.

Nate Geraci, who heads an investment advisory firm called ETF Store, commented, “That speaks to the overall power of ARK right now. At this point, investors think anything Cathie Wood touches turns to gold.”

Even more remarkable is the short timeframe in which her themed-ETFs have attracted investments. It took ARK’s flagship innovation fund, which launched in 2014, over 3.5 years to reach the $1 billion mark. In stark contrast, the fintech ETF she launched in 2019 reached the $1 billion mark in just 21 months. This puts ARK’s ETFs in a rare league. State Street’s SPDR Gold Trust set the record for being the fastest fund to reach to top $1 billion, hitting that milestone in only 3 days.

ARK Capital Growth
ARK Capital Growth
Image credit: Pixabay

Wood’s rise to fame is partly attributable to her loyal base of followers. Her fans diligently review her videos and tweets, hoping to get in the firm’s next innovative ETF. James Carter, a 31-year-old tech writer, explained his enthusiasm: “I was kind of late with the other funds. So I specifically set money aside for the new ARK fund just because of my interest in ARK. I wanted to get in early.” Another avid investor, 19-year-old Carter Wang, attributed part of his interest in several of Ms. Wood’s funds to her aggressive calls on Tesla. Ms. Wood projects that Tesla’s stock price will surge past $3,000 per share by 2025.

Just over a year ago, Wood was a fund manager operating at a much smaller scale. Today, the share price of ARK’s flagship innovation fund is six times higher than when it started in 2014. Her other funds have similarly experienced eye-popping gains over the past year. Some of ARK Investment Management LLC’s best performing ETFs include ARK Innovation, ARK Genomic Revolution, ARK Next Generation Internet, ARK Fintech Innovation, and ARK Autonomous Technology & Robotics.

Themed-ETFs have attracted a fair share of criticism. One of the main arguments is that they don’t properly reflect the market they purport to represent. With the ARK Space Exploration and Innovation ETF, for example, companies included in the investment portfolio include Deere & Company, Lockhead Martin, and Boeing. While these companies are manufacturers of parts relating to space travel, space exploration is a pretty peripheral area of focus for these manufacturers. Even Netflix stock earned a spot in the ARK Space Exploration and Innovation ETF portfolio because ARK redefined the term “space exploration” to include beneficiaries of space technology.

The same companies often find themselves being recycled into many of these trendily themed ETFs, as these portfolios stretch their themes to encompass companies that are a borderline fit for the theme. Some say including such stocks seems at odds with the ETF’s investment mandate and can cause confusion. Ren Leggi, an ARK client portfolio manager, acknowledged the critical feedback but affirmed that they remain aligned with the fund’s mandate.

An ETF is a type of security that tracks a particular stock market index, sector, or asset class. Exchange-traded funds are composed of a collection of different companies’ stocks. The securities underlying the ETF usually have one or more unifying characteristics. Although ETFs trade on an exchange similar to stocks, ETFs can be composed of stocks, bonds, commodities, and various other types of securities. Any given ETF can be composed of tens, hundreds, or even thousands of stocks.

The diversification of ETFs can help offset portfolio risk. If a single stock or bond in a portfolio is underperforming, gains in other stocks or bonds in the portfolio can help offset the impact.

Some of the most renown funds are those that passively track a particular stock index. Some of the largest ETFs, in terms of assets under management (AUM), include the SPDR S&P 500 ETF, iShares Core S&P 500 ETF, and Vanguard Total Stock Market ETF.

While they share many similarities with mutual funds, ETFs are traded throughout the day. In contrast, mutual funds generally only trade once per day after the market closes. ETFs typically also have greater liquidity than mutual funds and often require lower investment minimums.

Ryan Carpenter serves as Attorney and Managing Director of Carpenter Wellington. Ryan advises clients across a broad set of corporate and commercial matters.

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