Let me be clear about ETF. ETF should stay a passive investment vehicle. I started to build asset allocation via ETFs 15 years ago for Pension and Insurance funds.
I always advocated that “smart” beta ETF could be dangerous, misleading investors in a kind of comfort due to the pseudo security of any ETF wrapper.
ARK is active asset management wrapping its thematic into ETFs wrapper. As a specialist in ETF I have a look at the holding of ARK thematic, my main comments :
- High concentration in top 10 holdings. In some thematic, the top 10 weighs more than 40% of the AuM.
- High concentration in the highest momentum stocks.
- Even if strategy names are different, some of the big holdings are replicated across different strategies.
- Interesting to see the Grayscale BITCOIN ETF in the ARK Next Generation ETF.
- When you see investment banks building piles of structured products backed with ARK ETFs, this is the time to fly away.
Anyway, the main problem of this over-concentration in the high momentum TECH stocks nest in the NASDAQ weakness. Some hedge funds and Investment banks will start to short these stocks, forcing these “passive” strategies to reduce their exposure. In addition, if outflows are joining the game, you have a beautiful example of a house of cards, just ready to shut down…
This overconcentration in some bets is catastrophic when clones are engaged. The Bloomberg article highlights this point.
ARK now owns more than 10% of at least 29 companies via its exchange-traded funds, up from 24 just two weeks ago, according to data compiled by Bloomberg.
Less discussed are holdings of Nikko Asset Management, the Japanese firm with a minority stake in Ark that it has partnered with to advise on several funds. When combined, the pair own more than 25% of at least three businesses: Compugen Ltd., Organovo Holdings Inc., and Intellia Therapeutics Inc. Together they control 20% or more of an additional 10 companies.
The Reddit.com community will love that!!! The average short interest as a percentage of float for ARKK holdings is 4.4%, according to Bloomberg calculations based on data from IHS Markit Ltd. The average is 3.4% for Russell 3000 companies and 2.3% for those in the Russell 1000.
Our liquidity risk light is flashing orange and this is not a good omen if this kind of house of cards implodes.
For me, the investment is an interesting combination of art and science. ARK doesn’t support both when you put 40% of your fund allocation in the most named stocks on Internet…
Now ARK and Nikko are hooked to the intervention of the FED to cool down the Treasuries outflows. As I mentioned in my Global Macro Insight, TECH is a Duration Trade… Not sure that ARK setup understands what does it mean…