If you've been burned by buying one of the ARK ETFs near their tops earlier this year or if you just think stocks are overvalued or if you're someone who's looking for a good way to bet against Cathie Wood, the ETF for you has just launched.
The Tuttle Capital Short Innovation ETF (SARK) made its debut on Tuesday. In a press release announcing the fund's launch, Tuttle said:
"This distinctive exposure allows investors to potentially profit from a decline in a portfolio of companies involved in disruptive industries such as electric vehicles, next-gen internet, genomics and fintech."
While it wouldn't be unusual to see an ETF that shorts specific areas of the market, Tuttle is taking it one step further. It's not just shorting disruptive innovation names. It's shorting the ARK Innovation ETF (ARKK) itself. It's an ETF that shorts another ETF.
To my knowledge, this is the first ETF I've seen that takes a single position in another fund, long or short. The closest thing I can think of is the Vanguard Total World Bond ETF (BNDW), which is simply a 50/50 mix of the Vanguard Total Bond Market ETF (BND) and the Vanguard Total International Bond Market ETF (BNDX). You can see why Vanguard would do this though. It's just easier and more cost effective to construct an all-world portfolio this way. SARK is simply betting in the opposite direction of an industry peer.
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SARK's launch probably raises a few unique questions, so let me try to answer some of the bigger ones.
Is this Tuttle taking a personal shot at Cathie Wood?
No. I know it's easy to assume that this is the case, but Matthew Tuttle has gone to great lengths to insist this is nothing personal against Cathie Wood or ARK (and I believe him). His company is simply presenting an ETF option that serves a universe of investors seeking to make bets against the ARK ETFs.
He's right too. Ever since the ARK ETFs started delivering negative returns early this year, Cathie Wood has turned into an incredibly polarizing figure (some, of course, would argue that this was the case long before 2021). Her disruptive innovation thematic investing style simply went out of favor at exactly the time when a lot of investors were piling in trying to capture huge returns. At one point earlier this year, it was estimated that more than half of the money in ARKK was underwater despite years of hefty returns.
There is a large population of investors who want to short the ARK funds, whether it's because of Cathie Wood specifically or they believe this sector is overvalued or whatever. Does the idea itself seem a little tacky? Perhaps. It's easy to interpret it this way, but there is a legitimate business case for its launch.
Can Tuttle do this?
Yes. There's nothing prohibiting an ETF from taking a position in another ETF. It's actually done all the time. In fact, the second largest holding in the ARK Space Exploration & Innovation ETF (ARKX) is the ARK 3D Printing ETF (PRNT). In a world where ETFs can take tripled leveraged positions in oil futures contracts, SARK is relatively tame by comparison.
There is one thing that SARK needed to change though - its name. In its original SEC filing, the fund was called the Tuttle Short ARKK ETF, but later was changed to its current name. Perhaps regulators thought that this was a little too direct, but the objective of shorting ARKK stayed the same.
Why not just short the ETF yourself?
This is the reason why the fund launched in the first place and why it has a legitimate shot at becoming a popular trading vehicle over time.
Shorting is expensive and not everyone can (or wants to) do it. For less seasoned investors, the idea of placing a short trade can be intimidating, especially if they're unsure exactly what they're getting themselves into. SARK gives them a clean and easy tool for shorting ARKK without needing anything special outside of a brokerage account.
The main issue, however, might be cost. I came across this tweet yesterday regarding the SARK launch.
I've never tried to short a single share in my entire life, so I'm going to take this poster's word for it. It sounds reasonable though. To short ARKK (or probably any popular ticker) results in a huge trading fee, in many cases making it untenable to even make the trade in the first place.
SARK will charge an expense ratio of 0.75% to essentially place the trade for you. That's a huge cost advantage and when taking in consideration of the fact that it saves you the trouble of shorting yourself, you can see why this ETF might hold a great deal of appeal to certain investors.
I have no idea how successful SARK might be. A lot of ETFs launch and fail to attract a crowd, but this one is unique. It has a built-in audience and as long as they find it, I'm betting that SARK ends up doing fairly well.