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Tuttle Files For A Short ARKK ETF

The fund would take advantage of a wave of negative sentiment against Cathie Wood.

With more than 200 new ETFs being launched in 2021, I thought we'd seen just about every flavor of niche, strategy and target market fund out there (with the exception, of course, of the elusive bitcoin ETF). This is a new one.

Tuttle Capital Management just filed to launch the Tuttle Short ARKK ETF (SARK). It's objective is just what it sounds like. It's going to use swap agreements in order to bet against the $22 billion ARK Innovation ETF (ARKK). SARK plans on charging 0.75% annually.

It's a bold idea to say the least - one ETF betting against another ETF. It's still a filing at this point, so who knows if the SEC is going to have an issue with it. There are already dozens of inverse ETFs out there betting against against a sector or commodity, but none that I'm aware of that bet specifically against someone else's product.

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I have a few thoughts on this product.

This Is Nothing Personal Against Cathie Wood

I'm waiting for someone to make the awful take that this is some sort of personal shot or vendetta against Cathie Wood. It's not. CEO Matt Tuttle even said so himself on Twitter.

As is true for any ETF launch, there's a business case for the launch of SARK. Tuttle is just taking advantage of the current business environment. As I see it, there are two objectives in place for launching SARK.

First, investor sentiment in many circles has turned sharply against Cathie Wood and ARK because they've been unable to continue their streak of phenomenal returns over the past several years. For the record, ARKK is down 3.6% on the year, but sits about 24% below its all-time high. With so much money flowing into this fund over the past year and entering at the wrong time, it's been estimated that the majority of money in ARKK is now underwater on its initial investment. This product gives investors a way of betting against the ARK products.

Second, many retail investors have no way of easily shorting a product whether it's because they're not approved for shorting by their brokers, there aren't shares available to short or it becomes too costly to do so. In an email to Bloomberg, Tuttle explains.

“In sum, as ARKK already represents a long exposure to a basket of unprofitable tech stocks, we thought that investors should have access to the short side as well,” Tuttle wrote in an email. “Keep in mind there are a lot of non institutional investors, that cannot short stocks or ETFs or they may have trouble finding a borrow to put on the short.”

This gives smaller investors an easy way to essentially short the fund without needing to go through all the legal hoops to make it happen themselves.

Investor Sentiment Has Suddenly Turned Against Cathie Wood

There's no question that Tuttle is taking advantage of how investors currently feel about Cathie Wood and ARK. A year ago, there was no hotter name in not just the ETF world, but all of Wall Street. Her firm's focus on disruptive tech was incredibly in favor and her funds took advantage of it. Huge bets on Tesla (TSLA), which were thought to be wildly optimistic at the time, actually hit and Cathie Wood became a household name. Everybody loved her and wanted to jump on board.

Turn the page to 2021 and the narrative has changed. ARKK began the year by posting further gains, but her high growth style fell out of favor in February and the fund has yet to recover. Even worse for ARK, it happened right at the time when investors were piling into the fund in droves.

Yes, the same issue happened back in 2020 during the COVID recession, but the scale wasn't nearly the same as it was today. Back then, ARKK was just a $2 billion fund, so far fewer investors were impacted. The fund dropped more than 40% in value from peak to valley, but it was back to all-time highs within two months. Moreover, this was during a time when all risk assets were plunging in value, so these losses didn't stick out like a sore thumb.

Today, far more investors are impacted, there hasn't been the quick turnaround that there was last year and these losses are occurring during a time when the S&P 500 and the Nasdaq 100 are regularly hitting new all-time highs. ARKK's underperformance is a high profile outlier today.

Now, Cathie Wood has the scarlet letter in many circles. She's been labeled overrated, toxic, a fraud and other names not fit for print here. I don't believe the vitriol is warranted. Her and her firm's ability to identify winners over the past five years is nearly without precedent and a period where her investing style fell out of favor was inevitable. Despite her best efforts, a period of underperformance was bound to happen eventually and it finally arrived in 2021.

The launch of SARK simply takes advantage of that timing with a product that allows disgruntled investors an opportunity to begin betting against ARKK.

Will SARK Be Successful?

If the word can get out to a larger audience, there's certainly a market for a product like this. One can argue whether the idea of launching an ETF that bets against someone else's ETF is in good taste, but there's little question that a large population exists that would be willing to use a product like SARK.

Tuttle offers six ETFs currently with the largest being the Tuttle SPAC & New Issue ETF (SPCX) at $99 million in assets. I can see SARK quickly becoming bigger than that and easily becoming the company's most high profile offering yet.

No word on when it might launch if approved by the SEC.

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