ETF Wrap: Short sellers rack up big profits betting against Cathie Wood’s ARK ETFs — but her ‘core’ following is sticking through a bruising 2022

Meanwhile, ARK has no “visibility” into whether Bill Hwang, the founder of Archegos Capital Management who was arrested this week for alleged securities fraud, still holds a position in the firm’s ETFs, according to a spokesperson for ARK. More on that topic below.

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Short sellers are scoring big profits from Cathie Wood’s ARK Investment Management funds. 

Four of ARK’s exchange-traded funds — the ARK Fintech Innovation ETF
ARKF,
+1.23%,
ARK Innovation ETF
ARKK,
-1.29%,
ARK Next Generation Internet ETF
ARKW,
+0.68%
and ARK Genomic Revolution ETF
ARKG,
-3.41%
— are among the most profitable ETF shorts this month through April 26, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners. That’s based on mark-to-market returns for U.S. ETFs with a minimum of $50 million in average short interest for April, he said in an email, citing this chart.

Short bets against Wood’s flagship ARK Innovation ETF have seen mark-to-market profits of almost 26% this month and much larger gains this year of more than 61% through April 26, according to Dusaniwsky.

Short sellers seek to profit by borrowing shares and then selling them on the bet their price will fall. When their wager turns out right, short sellers make money by buying the shares back at a lower price and pocketing the difference when returning them to the lender.

“The risk is very, very high,” as the potential for losses in short bets gone wrong is unbounded, Dusaniwsky said by phone. “It’s not for the faint of heart, nor is it for people who don’t have larger balances,” he said, adding that “the vast majority” of short selling is generally done by institutional investors.

While shares of the ARK Innovation ETF have tanked in the U.S. stock market’s selloff this year, the fund has continued to see net inflows as Wood appears to have a “core following” of  investors who have bought into her long-term growth story, according to Aniket Ullal, head of ETF data & analytics at CFRA Research. “They are still sticking with her,” he said by phone. 

Investors have added a net $933.9 million to Ark Innovation this year through April 26, including about $224 million over the past month—“that’s impressive inflow given the performance,” according to Ullal. The market is in “a phase where a lot of growth-oriented strategies are under pressure,” he said, and “I think they understand that her fund is not going to perform well in this current market environment.”

By contrast, Invesco QQQ Trust
QQQ,
+3.33%,
which tracks the Nasdaq-100 index, has seen almost $1.9 billion of outflows this year through April 26, with investors pulling $710 million in the past month, according to Ullal.

The ARK Innovation ETF is “a kind of a turbocharged QQQ ETF,” said Dusaniwsky. Some investors have wagered against Wood’s flagship fund as a “hedging strategy” for their tech portfolios or to bet against growth equities, which have lagged value stocks in 2022, he said. 

Both ARK Innovation and Invesco QQQ Trust have been badly bruised this year, but the ARK fund has been harder hit.

Shares of Invesco QQQ Trust have fallen 12.6% this month through Wednesday, bringing its year-to-date drop to 20.4%, FactSet Data show. Shares of the ARK Innovation ETF have plunged 47.6% this year after dropping 25.2% this month through Wednesday.

On Thursday, one of Ark Innovation ETF’s top holdings, Teladoc Health Inc., plummeted after the telemedicine company slashed its full-year outlook and took a massive impairment charge.

Shares of Teladoc
TDOC,
-42.99%
were down about 47% around midday Thursday. Wood’s ARK Innovation ETF was also down in trading Thursday, sliding about 7% around midday before trimming those losses to around 3% by early afternoon, FactSet show, at last check.

Bill Hwang

Bill Hwang, whose family office Archegos Capital Management imploded in March 2021, was an early investor in ARK’s first four ETFs. 

“He did provide the seed for our first four ETFs and we were very grateful to him,” Wood, ARK’s founder, chief executive officer and chief investment officer, said during a CNBC interview on May 7, 2021. “It was at a time where market makers were sick of seeding new strategies.”

Read: ARK’s Cathie Wood keeps cool over dismal May start — and reveals Archegos’s Hwang seeded ETF launches

“Neither Archegos nor Mr. Hwang invested in the ARK ETFs prior to their launches, nor did they make any primary investments,” a spokesperson for ARK said in emailed comments.

“We were informed that Mr. Bill Hwang, on behalf of Archegos, made an early de minimis investment spread over the ARK ETFs in the secondary market at the market price,” the spokesperson said in the email. “Importantly, we only are addressing this since Mr. Hwang made previous public comments on this topic.”

ARK doesn’t know whether Hwang still has a position in the firm’s ETFs.

“Due to the nature of ETFs trading over secondary exchanges, we do not have visibility of individual holders,” according to the spokesperson for ARK. “As a result, we do not know if or when the position was exited.” 

Hwang was arrested April 27 on charges of securities fraud as he allegedly engaged in a market manipulation scheme, according to a statement from the U.S. Attorney’s Office for the Southern District of New York. His attorney Lawrence S. Lustberg has said that Hwang is “entirely innocent of any wrongdoing” and that “there is no evidence whatsoever that he committed any kind of crime.”

Read: ‘It’s a sign of me buying.’ Inside the indictment of Archegos owner Bill Hwang

“We have never had any business relationship with Mr. Hwang or Archegos and neither Mr. Hwang nor Archegos has ever been an investor in ARK Investment Management LLC or any of its affiliates,” according to the emailed comments from the ARK spokesperson. 

Bets against ARK fund family

So far this year it has paid off to short ARK’s family of funds, according to S3.

Short trades tied to the ARK Fintech Innovation ETF, ARK Genomic Revolution ETF, ARK Innovation ETF, ARK Autonomous Technology & Robotics ETF
ARKQ,
+1.85%,
ARK Next Generation Internet ETF, ARK Space Exploration & Innovation ETF
ARKX,
+2.61%,
ARK Israel Innovative Technology ETF
IZRL,
+2.08%
and 3D Printing ETF
PRNT,
+1.76%
are up a total $1.8 billion, or around 58%, this year through April 26 on a mark-to-market basis, data from S3 show.

Meanwhile, the Tuttle Capital Short Innovation ETF
SARK,
+1.32%,
which is betting against Wood’s flagship fund, has soared 65% this year based on early afternoon trading Thursday, according to FactSet data, at last check.

Read: ‘Private markets get it,’ but disruptive tech is beaten-up in the stock market, says ARK’s Cathie Wood

No fund manager is immune to “factor” cycles in the market, “not even Cathie Wood,” said Ullal. The ARK Innovation ETF is a very “high-growth oriented fund,” he said, and investors have been favoring value. The Invesco S&P 500 Pure Growth ETF
RPG,
+2.43%
has tumbled 23.7% this year through Wednesday, while the Invesco S&P 500 Pure Value ETF
RPV,
+1.16%
gained 2.4% over the same period, FactSet data show.

As usual, here’s ETF Wrap’s look at the top and bottom ETF performers over the past week through Wednesday, according to FactSet data. 

The good…

…and the bad

Source: FactSet, through Wednesday, April 27, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater

Weekly ETF reads:

Invesco Launches Electric-Vehicle Metals ETF Amid Price Surge (The Wall Street Journal)

Cathie Wood buys the dip on pandemic darlings Roku, Zoom, Roblox (Reuters)

Dip Buyers Bail on China Tech ETF as Faith in Rebound Wanes (Bloomberg) 

SEC launches probe into ETF revenue-sharing deals (Financial Times)