ARKK: Cathie Wood Now Playing Both Sides

Aug. 10, 2022 5:58 AM ETARK Innovation ETF (ARKK)ARKG, CRSP, NVTA, QQQ, TDOC46 Comments
Bill Maurer profile picture
Bill Maurer
33.34K Followers

Summary

  • Behind the scenes movements continue in multiple ETFs.
  • Flagship fund ARKK is now essentially buying and selling in same day.
  • Transparency is a key as ARKK ETF's performance continues to deteriorate.

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Back in late March, I detailed how there was some unusual activity going on with the ARK Innovation ETF (NYSEARCA:ARKK). Cathie Wood's flagship fund was making more moves with some of its components than investors could see in the firm's daily trades e-mail. A number of months later, these behind the scenes moves have continued, but they just took another step further that really brings into question the firm's supposed transparency.

As a reminder, the ARKK ETF was effectively selling certain names behind the scenes. On a daily basis back then, 7 names were being underweighted when it came to inflows or redemptions. For example, if ARKK experienced an inflow equal to say 1% of its assets, these stocks might only get an inflow equal to say 0.3% of their previous day's position, or they might not have an increase at all. On days where there were redemptions, these select names would see a larger decrease in their positions, on a percentage basis, than the rest of the fund's holdings.

These unusual moves weren't just happening in the flagship fund, however. I also saw it happening in the ARK Genomic Revolution ETF (ARKG) that had some similar components to ARKK. Teladoc (TDOC) and CRISPR Therapeutics (CRSP) saw this underweighting happen in both ETFs, for example, and we're talking about quite significant share amounts that accumulated over time. It was hard to listen to Cathie Wood be so positive on Teladoc when she was effectively trying to reduce her firm's holding of the name without anyone really knowing unless you tracked every position on a daily basis.

Since I started tracking these occurrences earlier this year, I estimate about $300 million worth of stock has been impacted by these behind the scenes moves. That number is likely a bit low considering I've only followed ARKK's daily changes in depth, with just a small focus on ARKG for a couple of weeks. If this situation is also happening in any of the firm's other four active ETFs, we could be talking about half a billion dollars or more of unusual activity. This is just what I've seen so far in 2022, as this also happened last year as well, and we know the ARK ETFs have been around for several years now.

Cathie Wood and ARK Invest like to boast how transparent they are, but this activity would seem to go against that notion to quite a degree. Unfortunately, it seems the team there has taken this situation to another level this week. In the graphic below, you can see position changes for ARKK on Monday for a chunk of the ETF's holdings. The rest of the names not seen also showed a redemption equal to 0.40% of their Friday holding size.

Daily ARKK Changes

ARKK Changes August 8th (ARK Invest)

You will notice that Invitae (NVTA) shows a redemption of 70 basis points for the day, unlike the rest of the ETF's components that were down on Monday by 40 basis points. The genetics company has seen its shares drop in recent weeks after a major revenue warning put its growth story in question for the next couple of years. Cathie Wood has been a major supporter of Invitae in the past couple of years, accumulating a position from the double digits down to the low single digits where shares currently trade.

This small genetics firm is one of a handful of names where ARK Invest owns more than 10% of the entire company through its 8 total active and index ETFs. Invitae was one of the original 7 names back in March and April that saw this unusual inflow or redemption activity, and this pattern has continued with the stock for a number of months now. Monday, however, was different as you may have noticed above in the daily e-mail column. If you missed it, here's what ARK Invest detailed for its ARKK trades on Monday.

ARKK August 8th Trades

ARKK August 8th Trades (ARK Invest)

So to recap what happened here - on Monday, the ARKK ETF increased its allocation to Invitae by more than 626,000 shares. On the same day, Cathie Wood and her team reduced the Invitae allocation by 30 basis points of its prior trading day's position by underweighting it in the redemption basket. Thus, it appears that ARKK is trying to be positive on Invitae by showcasing it in the daily trades e-mail, but reducing the position behind the scenes a bit more due to redemptions than the rest of the ETF's holdings.

I should note that during these three major activities of unusual activity, the behind the scenes activity for Invitae has roughly equaled 3.6 million shares. This means that had the inflow or redemption amount on a percentage basis been the same for Invitae as the rest of the ETF's holdings on a daily basis, the ARKK position in Invitae would be nearly 20% more than its current roughly 18.4 million shares. That's quite a significant difference that most investors may not be aware of.

The idea of transparency here gains greater importance as Cathie Wood's active ETFs have performed terribly over the past 18 months or so. As pointed out on Twitter, 21 of the flagship fund's holdings have already reported a revenue, EPS, or subscriber miss during this earnings season so far, or they issued lower than expected revenue guidance for their current fiscal quarter and or year. With the dramatic pullback in ARKK shares from its nearly $160 peak to the high $40s currently, the ETF is now trailing the Invesco QQQ ETF (QQQ) by more than 75 percentage points since inception as seen below.

ARKK vs. QQQ performance

ARKK vs. QQQ Performance (Yahoo! Finance)

In the end, the behind the scenes activity in ARKK has continued, but the fund took an extra step forward on Monday. The active ETF firm detailed that it increased its allocation by over 626 thousand shares of genetics company Invitae during the day, but also meaningfully underweighted the name for its redemption basket on Monday. This essentially makes it seem like Cathie Wood and her team are buying and selling the name at the same time, but really only highlighting the purchase activity in a more public way (the daily trades e-mail). In total, we're now talking about hundreds of millions of dollars' worth of stock that has been impacted in less than six months. It's not a good look for a firm that continues to talk about its tremendous transparency, especially at a time when its performance is very disappointing.

This article was written by

Bill Maurer profile picture
33.34K Followers
I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year. Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

Disclosure: I/we have a beneficial long position in the shares of TWLO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Author is long TWLO calls at time of submission, but will be selling position on Wednesday morning. TWLO is a holding of ARKK. Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial advisor before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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