The ARK ETFs are known for their overarching theme of "disruptive innovation". They're known for high growth but also high volatility, something that shareholders have unfortunately learned about the hard way in 2021.
Their latest ETF, which is set to launch this week, is going to be unlike anything they've done before. The ARK Transparency ETF (CTRU) has the goal of targeting the 100 companies that it defines as "most transparent". The idea is that companies with greater transparency and visibility can offer greater long-term return potential to shareholders.
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That objective alone could be considered unusual for ARK given the "swing for the fences" nature of its other 8 ETFs. CTRU, however, goes another step further by adding an ESG screen to its investment strategy.
Yes, ARK is jumping on the socially conscious investing train.
Inside The ARK Transparency ETF
CTRU plans on avoiding all of the areas that you might expect when going ESG - tobacco, alcohol, fossil fuels and gambling - but avoids some other industries as well that on the surface seem like curious areas to avoid.
The banking sector, for instance, is out altogether as is the "confectionary" space. By eliminating sweets, I guess ARK is looking out for your waistline as well as your brokerage account!
At a high level, the fund will track the Solactive Transparency Index, which will assign an overall transparency score to potential components using several criteria. The specific algorithm is proprietary, but we can get a pretty good sense of what a company needs to do in order to make the cut.
Not surprisingly, the more companies disclose, the better. While that certainly applies to legal documents, such as annual reports, privacy disclosures and diversity practices, it also applies to what the end consumer more directly can see. That includes website descriptions of products, costs, user reviews and other details.
Reputation risk is also considered. The number of lawsuits outstanding as well as the nature of those legal claims will negatively impact the final transparency score.
In the end, the universe of potential stocks will be narrowed down to 100 names with the highest transparency scores. Those companies, which must have a market cap of at least $1 billion and meet certain liquidity requirements, will be equal weighted.
Inside The ARK Transparency ETF Portfolio
Even though CTRU isn't expected to launch until Wednesday, we can look at the underlying index to see how the portfolio will look.
The fund leans heavily towards large- and mega-cap names, but that's not all that unusual when comparing some of the other major ARK ETFs. This composition is relatively similar to that of both the ARK Innovation ETF (ARKK) and the ARK Next Generation Internet ETF (ARKW). There's a little geographic diversity, but this is still a fund that will focus heavily on U.S. names.
The sector breakdown is kind of interesting. Even though the transparency screen runs across all segments of the equity markets, it's still heavily tilted towards tech. There is a surprising amount of diversity here, including areas that seem not very ARK-like. You won't find much in the way of consumer staples or real estate exposure outside of this fund.
Many of CTRU's top holdings look like what you'd see in an ARK portfolio, but there are also names that don't necessarily look like the others.
Tesla (TSLA), of course, is ARK's most popular holding as are names, such as Nvidia (NVDA), Cloudflare (NET) and Teradyne (TER), but you'll probably struggle to find The Buckle (BKE) in any other ARK ETF.
As has already been noted by others, ARK is launching a brand new ETF at a time when the popularity rating of Cathie Wood and her company may be at an all-time low. That probably ends up resulting in a pretty tepid start for this fund and I expect it could very well be the smallest in the ETF in the company's lineup for a while (the ARK Israel Innovative Tech ETF (IZRL) is currently the smallest at around $260 million).
ARK's last new ETF - the ARK Space Exploration & Innovation ETF (ARKX) - came roaring out of the gate following its launch at the end of March and had nearly $700 million in total assets in less than its first three weeks. That number has shrunk to around $540 million amid a surge in outflows across virtually all of the ARK ETFs.
CTRU is going to be playing in a much bigger sandbox since ESG funds are being offered by almost every major ETF issuer nowadays. The ARK name will set this fund apart from the others, but will that end up helping or hurting in the current environment?
The 0.55% expense ratio probably won't help against other ultra-cheap ESG funds, but ARK's expense ratios are generally of little consideration for investors. Even though you can buy the Vanguard ESG U.S. Stock ETF (ESGV) for 0.12%, I don't think CTRU's expense ratio will be a turnoff.