By Cinthia Murphy
In the ETF industry, we like to think of the ETF wrapper itself as the greatest financial vehicle of all time. It’s low cost (relative to other types of funds). It’s transparent. It’s liquid. It’s tax-efficient in a way mutual funds are not. It’s easily tradable and, most importantly, it’s easily accessible by anyone anywhere.
If you believe everyone should have access to markets, chances are, you are a big fan of ETFs.
The only catch to this thinking is that it makes it easy for us to overlook the importance of fund structure itself. Dan Weiskopf @ETFProfessor has said this many times before, and it rings true every time: structure matters.
We were reminded of that fact and the role structure plays in relation to investment access and outcomes when Cathie Wood, from Ark Invest, filed paperwork to launch an Ark interval fund. The filing hit the pipeline and we took a collective gasp. Not an ETF?!
An interval fund is a closed-end mutual fund. That means transparency and liquidity are not its hallmarks. Costs are typically higher. Access to an interval fund is not open to anyone and everyone—these funds are usually available to accredited investors and there are buy-in minimums. Exiting is even more limited, as there’s no trading on exchanges (no secondary markets for these funds) and you may not be able to unload all the shares you want whenever a redemption window opens, so getting in and out of a position is a restricted, controlled experience.
An interval fund is not about easy access. In fact, the traditional features of an interval fund stand in stark contrast to those of an ETF as an open-ended fund structure that’s known for democratizing market access.
But Ark’s recent move, while unexpected, may not be entirely surprising. The firm’s massive success, with its active disruptive innovation strategies in a short period of time, highlighted some of the limitations of the ETF wrapper itself.
Consider that the Ark Innovation ETF (ARKK), Ark’s flagship ETF, took in some $15 billion in net inflows in only 12 months during the height of the pandemic, between March 2020 (pandemic low) and March 2021. Together with counterparts ARKG, ARKW, AKRF and ARKQ, this group of ETFs attracted more than $35 billion in that short time period.
The following 11 months (to date) have seen nearly $9 billion run for the exits, within this group of ETFs, as performance plummeted when disruptive growth as a theme ran out of favor.
That kind of demand where the creation/redemption mechanism is running full steam to keep up with investor appetite raises concerns about capacity and liquidity of the underlying holdings. In Ark’s case, these concerns are particularly real because their strategies seek to invest in some of the newest and often very small companies.
The Ark Venture Fund, as detailed in their regulatory filing, will invest in publicly traded stocks, but also privately placed and/or restricted securities as well as illiquid, private names. The interval fund structure will, in theory, allow Ark to fish in a deeper pond in search of companies that are innovating and disrupting the way the world works without having to worry about the daily business of ETF creation and redemption.
For the end investor, more choices are always better than fewer choices. But choices within the universe of ETFs and more broadly of funds in general are rarely equal, which is why my colleague Dan Weiskopf would say (again) that structure matters.
For more news, information, and strategy, visit ETF Trends.
Disclosure
All investments involve risk, including possible loss of principal.
This material is provided for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).