ETF Inflows Top $1 Trillion for First | Stock Market News Today

A historic surge of cash has swept into exchange-traded funds, spurring asset managers to launch new trading strategies that could be undone by a market downturn. 

This year’s inflows into ETFs world-wide crossed the $1 trillion mark for the first time at the end of November, surpassing last year’s total of $735.7 billion, according to Morningstar Inc. data. That wave of money, along with rising markets, pushed global ETF assets to nearly $9.5 trillion, more than double where the industry stood at the end of 2018.

Most of that money has gone into low-cost U.S. funds that track indexes run by Vanguard Group,

BlackRock Inc.

BLK 0.66%


State Street Corp.

STT -0.50%

, which together control more than three-quarters of all U.S. ETF assets. Analysts said rising stock markets, including a 25% lift for the S&P 500 this year, and a lack of high-yielding alternatives have boosted interest in such funds.  

“You have this historical precedent where you have tumultuous equity markets, and more and more investors have made their way to index products,” said

Rich Powers,

head of ETF and index product management at Vanguard.

Asset managers are looking to actively managed funds, some with narrow themes, in search of an unfilled niche not already dominated by the industry’s juggernauts, analysts and executives said. VanEck, for example, earlier this month rolled out an active ETF targeting the food industry. In March, Tuttle Capital Management launched its


which is bullish on stocks popular with individual investors. 

Firms including Dimensional Fund Advisors have converted mutual funds into active ETFs. Meanwhile, bigger firms have rolled out ETFs that mimic popular mutual funds, including Fidelity Investments’ Magellan and Blue Chip Growth funds.

“We should have a broad offering of ETFs that stand alongside a broad offering of mutual funds,” said

Gerard O’Reilly,

Dimensional’s co-chief executive, of his company. “Choose your own adventure.” 

As ETFs, baskets of securities that trade as easily as stocks, have boomed this year, investors poured a record $84 billion into ones that pick combinations of securities in search of outperformance rather than tracking swaths of the stock market. That represents about 10% of all inflows into U.S. ETFs, up from nearly 8% last year, according to Morningstar. 

Asset managers long known for running mutual funds are rushing to take advantage of investors’ interest in active ETFs. More than half of the record 380 ETFs launched in the U.S. this year are actively managed, according to FactSet. Fidelity, Putnam and

T. Rowe Price

are among the firms that have rolled out actively managed ETFs in 2021. Firms new to ETFs have also entered the fray. 

The top 20 fastest-growing ETFs, largely run by Vanguard and BlackRock, this year pulled in nearly 40% of all flows, charged an average fee of less than 0.10 percentage point and tracked benchmarks of some sort. 

Many active ETFs remain comparatively small and charge fees higher than passive funds, putting a swath of new products at risk of closing over the next several years. ETFs usually need between $50 million and $100 million in assets within five years of launching to become profitable, analysts and executives say; funds below those levels have tended to close. 

Of the nearly 600 active ETFs in the U.S., three-fifths have less than $100 million in assets, according to FactSet data. More than half are below $50 million. 

“You’re going to see a lot of those firms take a hard look at their future,” said

Elisabeth Kashner,

FactSet’s director of ETF research.

The stock market’s bull run has helped buoy many ETF providers, Ms. Kashner said, adding that firms have in 2021 closed the fewest number of funds in eight years. But a market pullback, which most stock-market strategists anticipate, could flush out weaker players, she said. 

Vanguard has been a beneficiary of high inflows to funds that track indexes. A statue of founder John C. Bogle.


Ryan Collerd for The Wall Street Journal

ETF closures generally climbed over the past decade, and firms closed a record 277 ETFs last year as the coronavirus pulled markets down. Many held few assets. About a third of all active ETFs are marked as having a medium or high risk of closure, according to FactSet data that take into account assets, flows and fund closure history. 

Factors that have helped stoke active launches, analysts and executives said, include rules streamlined by regulators in late 2019 that made ETFs easier to launch. The approval of the first semitransparent active ETFs, which shield some holdings from the public’s eye, followed.

Analysts also said the success of ARK Investment Management Chief Executive

Cathie Wood

in 2020 showed how active ETFs can score big returns and pull in substantial sums of money. Several of ARK’s funds doubled last year, and its assets approached $60 billion earlier this year, though many of its bets have slumped in 2021. 


How long do you think the boom in exchange-traded funds will last? Join the conversation below.

Most other active managers aren’t doing much better. Two-thirds of large-cap managers of mutual funds have fallen short of benchmarks this year, while roughly 10% of the 371 U.S. active ETFs with full-year performance data are beating the S&P 500. More than a third are flat or negative for 2021. 

“Active management is a zero-sum game,” said FactSet’s Ms. Kashner. “Beating the benchmark quarter after quarter, year after year, is a very difficult task at which active managers have traditionally struggled. The ETF wrapper doesn’t change that calculus.” 

Write to Michael Wursthorn at [email protected]

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Cathie Wood’s ARK Faces Test as Tech Rally Cools | Sidnaz Blog

The stock market’s swift turn against technology and other growth stocks has handed star stock picker

Cathie Wood

and her firm, ARK Investment Management LLC, their toughest test yet.

The firm’s five exchange-traded funds all have declined more than 20% since early February, stung by a sharp rise in government-bond yields. The flagship

ARK Innovation ETF

has suffered the steepest declines, falling 27% from its Feb. 16 high. In comparison, the Nasdaq Composite Index has dropped about 8% over the same period.

Known as “Mamma Cathie” by individual investors on Reddit’s WallStreetBets forum, Ms. Wood touts in videos and podcasts her strategy of investing in what she calls disruptive companies—ones that she contends are destined to change the world and grow tremendously. Her bets range from investor favorites like

Apple Inc.


Tesla Inc.

to pandemic winners such as

Roku Inc.


Square Inc.

to little-known 3D-printing firm

Stratasys Ltd.

and Israeli therapeutics company

Compugen Ltd.

CGEN 0.06%


What’s your assessment of Cathie Wood’s and Ark Investment Management’s approach to investing? Join the conversation below.

Those gambles paid off handsomely last year, when Tesla jumped more than 700%, Square added 325% and Roku rose nearly 150%, helping ARK’s ETFs more than double. Ms. Wood earned wide acclaim as the hottest stock picker on Wall Street, but her star has fallen over the past two weeks as long-term interest rates suddenly marched higher and investors abandoned the growth trade en masse.

ARK Chief Operating Officer

Tom Staudt

said Thursday the firm isn’t overly concerned with the recent downturn, seeing it as a short-term market trend rather than the start of a permanent shift. He added the ETFs have functioned as expected and the firm’s portfolio managers are using the volatility to buy stocks that fit their philosophy and appear to be oversold.

Cathie Wood in videos and podcasts touts her strategy of investing in what she calls disruptive companies.

Among the factors compounding the pain for ARK are a series of highly concentrated positions, including small companies in which Ms. Wood’s firm owns a significant chunk of the stock. Bearish investors also are taking short positions to bet that ARK’s funds and some of its holdings will decline further.

The following charts help illustrate those dynamics:

Of the 164 stocks held across ARK’s five funds, 139 are down over the past month, according to daily holdings data compiled by Dow Jones Market Data. That is far worse than the S&P 500. Fewer than half of its constituents have declined over the same period.

ARK took sizable positions in many companies that were considered winners during much of the Covid-19 pandemic last year. But a number of the stocks held by ARK generate little or no profits, including Roku and Teladoc Health Services Inc., as well as electric-vehicle manufacturer

Workhorse Group Inc.

and Stratasys.

Analysts including those at

Goldman Sachs Group Inc.

have noted that shares of unprofitable companies have been some of the hardest hit by the recent selloff and recommended investors limit their exposure to such stocks. The declines so far have knocked shares of ARK’s flagship fund down to their lowest levels since late November.

Tesla counts as ARK’s biggest position in three of its funds, coming in right around 10% of those ETFs’ assets. ARK has a 10% soft cap on positions within its funds. Across all five ETFs, Tesla accounts for 7% of assets. Square, Roku, Teladoc and the cryptocurrency bitcoin are among some of its other biggest holdings.

Michael Purves,

chief executive of Tallbacken Capital Advisors, said he has been warning investors about investing in the innovation fund’s individual holdings, given that many are smaller stocks that can be prone to big swings.

“You don’t have to be in ARKK to be hurt by the ARKK situation,” Mr. Purves said of the innovation fund.

Among ARK’s five funds, 26 of its positions are in companies in which the firm holds more than 10% of all shares outstanding, according to data from the companies, FactSet and Dow Jones Markets Data.

Most of these stakes are in small companies that have market values below $5 billion and fewer shares available for trading on the open market.

“You have to think about the market impact you’re doing with small-caps,” said

Elisabeth Kashner,

director of funds research at FactSet. “Where the market prices of some of these less liquid securities were driven up rather quickly, they can then be driven down by the same speed as funds flow out.”

Investors are also becoming more bearish on ARK’s funds, creating a knock-on effect felt throughout the portfolio, said

William Kartholl,

director and head of ETF trading at

Cowen Inc.

Short interest as a percentage of the overall float of ARK’s innovation fund rose to about 11% as of Thursday, the highest level ever, according to S3 Partners. Investors also are increasingly bearish on ARK’s Genomic Revolution ETF, with short interest rising to 8% of its overall float from less than 3% at the end of last year.

When investors short an ETF, shares are created by specialized investment firms known as authorized participants solely for the purpose of lending. That process involves authorized participants shorting the fund’s underlying stocks, which could be adding to the short interest in some of ARK’s holdings, Mr. Kartholl said. That can lead to increased volatility of the individual shares, he added.

Among the ARK positions with significant short interest are

Workhorse Group

and biotech firm

Beam Therapeutics,

BEAM 4.56%

both at about 20%, according to S3 data. Shares of Workhorse, which was briefly a target of Reddit’s day traders during the

GameStop Corp.

GME 10.64%

saga, are down 66% over the past month, while Beam has fallen 38%.

Write to Michael Wursthorn at [email protected]

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