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.
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