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%

and

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

FOMO ETF,

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.



Photo:

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. 

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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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Blackstone, AIG, NortonLifeLock, Morgan Stanley: What to Watch | Sidnaz Blog


Futures are mixed ahead of jobless figures and a second day of testimony from Federal Reserve Chairman

Jerome Powell

on Capitol Hill. S&P 500 contracts are down slightly. Nasdaq-100 futures are up, suggesting tech stocks will outperform.

Here’s what we’re watching ahead of Thursday’s trading action.

Prague-based Avast primarily makes free and premium security software, offering desktop and mobile-device protection.



Photo:

david w cerny/Reuters

  • Is the steam coming out of meme stocks?

    AMC Entertainment,


    AMC -15.04%

    one favorite of the Reddit trading crowd, lost 3.7% premarket. If matched once trading begins, the stock would extend a decline of 43% over the past month.

    GameStop


    GME -6.91%

    and

    BlackBerry


    BB -3.79%

    shares have both dropped by almost a quarter in that time.

  • Netflix


    NFLX 1.34%

    shares rose 2.6%. The streaming company, which reached a licensing deal over animated films with Universal this week, has been on a tear of late, gaining 11% for the month through Wednesday.

  • T. Rowe Price


    TROW -0.85%

    shares are up 2.6%. Analysts at Citigroup, Deutsche Bank and Morgan Stanley have raised their target prices for the stock in recent days. T. Rowe said this week it managed $1.62 trillion in assets at the end of June.

  • Supply-chain technology provider

    E2Open Parent


    ETWO -0.73%

    fell 1% after reporting a fall in profit and revenue in its fiscal first quarter from a year before.

Chart of the Day

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AMC Bet by Hedge Fund Unravels Thanks to Meme-Stock Traders | Sidnaz Blog


A multipronged bet on

AMC Entertainment Holdings


AMC 13.03%

boomeranged this month on Mudrick Capital Management LP, the latest hedge fund to fall victim to swarming day traders.

Mudrick’s flagship fund lost 10% in just a few days as a jump in AMC’s stock price unexpectedly triggered changes in the value of derivatives the fund held as part of a complex trading strategy, people familiar with the matter said.

The setback comes months after a group of traders organizing on social media helped send the price of

GameStop Corp.


GME 2.05%

and other stocks soaring in January, well beyond many investors’ views of underlying fundamentals.

The development prompted many hedge funds to slash their exposure to meme stocks. Mudrick Capital’s losses highlight how risky retaining significant exposure to such companies can be—even backfiring on a hedge-fund manager who was mostly in sync with the bullishness of individual investors.

Jason Mudrick,

the firm’s founder, had been trading AMC stock, options and bonds for months, surfing a surge of enthusiasm for the theater chain among individual investors. But he also sold call options, derivative contracts meant to hedge the fund’s exposure to AMC should the stock price founder. Those derivative contracts, which gave its buyers the right to buy AMC stock from Mudrick at roughly $40 in the future, ballooned into liabilities when a resurgence of Reddit-fueled buying recently pushed AMC’s stock to new records, the people said.

Day traders took their first run at AMC shares in late January.



Photo:

Bing Guan/Bloomberg News

As part of the broader AMC strategy, executives at Mudrick Capital were in talks with AMC to buy additional shares from the company in late May. On June 1, AMC disclosed that Mudrick Capital had agreed to buy $230 million of new stock directly from the company at $27.12 apiece, a premium over where it was then trading.

Mudrick immediately sold the stock at a profit, a quick flip that was reported by Bloomberg News and that sparked backlash on social media.

“Mudrick didn’t stab AMC in the back…They shot themselves in the foot,” read one post on Reddit’s Wall Street Bets forum on June 1. Other posts around that time referenced Mudrick as “losers,” “scum bags” and “a large waving pile of s—t with no future.” Members of the forum urged each other to buy and hold.

Inside Mudrick, executives were growing apprehensive as the AMC rally gained steam. The firm’s risk committee met on the evening of June 1 after the stock closed at $32 and decided to exit all debt and derivative positions the following day.

It was a day too late.

AMC’s stock price blew past $40 in a matter of hours June 2, hitting an intraday high of $72.62. Call option prices soared amid a frenzy of trading that Mudrick Capital contributed to and by the end of the week, the winning trade had turned into a bust. Mudrick Capital made a 5% return on the debt it sold but after accounting for its options trade, the fund took a net loss of about 5.4% on AMC.

Mr. Mudrick’s fund is still up about 12% for the year, one of the people said. Meanwhile, investors who bought AMC stock at the start of the year and held on have gained about 2000%.

The impact of social media-fueled day traders has become a defining market development this year, costing top hedge funds billions of dollars in losses, sparking a congressional hearing and drawing scrutiny from the U.S. Securities and Exchange Commission. More hedge funds now track individual investors’ sentiment on social media and pay greater attention to companies with smaller market values whose stock price may be more susceptible to the enthusiasms of individual investors.

Mr. Mudrick specializes in distressed debt investing, often lending to troubled companies at high interest rates or swapping their existing debt for equity in bankruptcy court. Mudrick manages about $3.5 billion in investments firmwide and holds large, illiquid stakes in E-cigarette maker NJOY Holdings Inc. and satellite communications company

Globalstar Inc.

from such exchanges. The flagship fund reported returns of about 17% annually from 2018 to 2020, according to data from HSBC Alternative Investment Group.

But distressed investing opportunities have grown harder to find as easy money from the Federal Reserve has given even struggling companies open access to debt markets. Mr. Mudrick has explored other strategies, launching several SPACS and, in the case of AMC, ultimately buying stock in block trades.

Mr. Mudrick initially applied his typical playbook to AMC, buying bonds for as little as 20 cents on the dollar, lending the company $100 million in December and swapping some bonds into new shares. Theater attendance, already under pressure, had disappeared almost entirely amid Covid-19 pandemic lockdowns, and AMC stock traded as low as $2. He reasoned that consumers would regain their appetite for big-screen entertainment this year as more Americans got vaccinated.

Day traders took their first run at AMC in late January, urging each other on with the social-media rallying cry of #SaveAMC and briefly lifting the stock to around $20. AMC’s rising equity value boosted debt prices—one bond Mudrick Capital owned doubled within a week—quickly rewarding Mr. Mudrick’s bullishness. AMC capitalized on its surging stock price to raise nearly $1 billion in new financing in late January, enabling it to ward off a previously expected bankruptcy filing.

Around that time, Mr. Mudrick sold call options on AMC stock, producing immediate income to offset potential losses if the theater chain did face problems. The derivatives gave buyers the option to buy AMC shares from Mudrick Capital for about $40—viewed as a seeming improbability when the stock was trading below $10.

Mr. Mudrick remained in contact with AMC Chief Executive

Adam Aron

about providing additional funding, leading to his recent share purchase. But he kept the derivative contracts outstanding as an insurance policy, one of the people familiar with the matter said.

Write to Matt Wirz at [email protected] and Juliet Chung at [email protected]

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Many Women of Color Use Social Media, Peers for Investment Advice | Sidnaz Blog


Many women of color are turning to social media and their peers for investment know-how instead of hiring financial advisers.

Individual investors are increasingly seeking free financial advice on platforms including TikTok,

Twitter

and YouTube. For women of color, nearly half say they are likely to turn to social media for financial guidance compared with 18% of white women, according to a study released in April by investment-management firm Capital Group.

The reasons for turning to their peers range from wanting free advice to a desire to manage their own portfolios, rather than outsourcing it to an adviser.


‘Some women may feel there’s a lack of cultural understanding by certain financial advisers and may not feel seen.’


— Ramona Ortega, founder of My Money My Future

Adri Saul,

who is Latina, started investing in the stock market in April 2020 after she joined the HerMoney

Facebook

group. Ms. Saul, who is in her 30s, was attracted to the group that was founded by personal finance author

Jean Chatzky

to help women with their personal finances, partly because she said it was easy to get answers to money questions and it is a nonjudgmental place to learn about investing.

While she appreciates the quality of information she has seen in the group’s posts, she still does her own research. Ms. Saul now has about $5,000 invested in various stocks such as

Twilio Inc.

and DocuSign Inc. with an online broker.

“Some women may feel there’s a lack of cultural understanding by certain financial advisers and may not feel seen,” said

Ramona Ortega,

founder of My Money My Future Inc., a fintech firm which in part aims to teach Black women and Latinas about investing and building wealth.

A December survey from J.P. Morgan Wealth Management found—when starting to invest—78% of affluent Black women and Latinas used self-directed educational resources, including online educational resources, apps or TV shows, compared with 47% of affluent white women.

Donye Taylor

started investing about two summers ago after a friend recommended she open a Roth IRA with an online broker. Investing in stocks and bonds was largely new to Ms. Taylor, a 26-year-old consultant and co-founder of a digital marketing company.

The California resident was raised by her aunt and uncle who encouraged her to save as much as possible but didn’t teach her about investing. Then about a year ago, another one of her friends suggested she also open an account on the brokerage platform Public.com, which she hadn’t heard of before.

“I naturally trust what another Black woman says,” said Ms. Taylor, referring to the friend who told her about Public.com. Ms. Taylor now has five figures invested in various stocks such as

Tesla Inc.

and

Roku Inc.

She is happy managing her own portfolio and doesn’t see the need to hire an adviser.

Donye Taylor says she’s happy managing her own investments.



Photo:

Rozette Rago for The Wall Street Journal

Like Ms. Taylor, many women of color want an active role in managing their money. Fifty-five percent of women of color like to be involved in the day-to-day management of their finances compared with 40% of white women, according to a study in 2020 by Cerulli Associates and Phoenix Marketing International.

If you are the first generation to have money to invest but aren’t familiar with the role of an adviser, you may be hesitant to sign on, said Ms. Ortega of My Money My Future.

Monée Williams

has been approached by financial advisers in the past, but didn’t see a point in hiring one when she thought she could learn many of the basics of investing online free from her peers.

“It just doesn’t seem worth it,” said Ms. Williams, who self-manges roughly $120,000 in an online brokerage account.

Ms. Williams started to learn about investing when she joined the Facebook group The Stocks and Stilettos Society about a year ago. The 40-year-old marketer from Atlanta enjoyed the free content, liked that the group was founded by another Black woman and appreciated the chance to occasionally socialize online with some of the women she met in the group.

SHARE YOUR THOUGHTS

How have your peers or social-media groups helped you navigate investing? Join the conversation below.

For example, she recently hosted a vision board party with some of the women whom she met in the group, where they each set and shared their goals, such as saving for a post-pandemic vacation.

Still, some women use caution when accepting tips from peers or online personal finance groups. That is a good thing, said Ms. Ortega.

“You’re likely not going to learn the fundamentals of personal finance and investing from someone else’s social media post,” she said. “But it can be a great place to start to get the basics.”

Write to Veronica Dagher at [email protected]

The GameStop frenzy put the spotlight on a growing group of investors who seek and share trading information on social media platforms like YouTube and TikTok. Three investors explain how these online communities are helping them chase the market. Photo illustration: Adam Falk/The Wall Street Journal

What You Need to Know About Investing

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A Pro Snowboarder and a Photographer Do What They Love. Now They | Sidnaz Blog


Erika Vikander

and

Drew Smalley

work for themselves, doing what they love.

Ms. Vikander, 30 years old, is a professional snowboarder who competes on the Freeride World Tour, descending steep mountain faces while jumping cliffs and crevasses. Mr. Smalley, 37, has a photography and graphic-design business.

The couple lives in Hood River, Ore., and would like to buy a home in the area over the next three to five years for no more than $225,000.

Mr. Smalley earns about $50,000 a year. His annual earnings have been steady for the past two years, though his monthly income fluctuates. Ms. Vikander earns about $30,000 a year from prize money, sponsorships and promotions on social media. Most of her income comes at the start of snowboarding season.

She has $5,000 in a savings account and $6,000 in her checking account. Mr. Smalley has $5,000 in his business account and $4,000 in a Roth IRA.

Earlier this year, Mr. Smalley invested $15,000 in his business and borrowed $36,000 from his family, to be repaid within 60 months at 8% interest. He is currently paying his family $2,000 a month, and recently used $3,200 he received from the federal Covid-19 relief bill to repay the debt faster. The couple’s only other debt is Ms. Vikander’s car lease with $5,500 outstanding. Mr. Smalley also owns a 2014 pickup truck.

Their monthly expenses include: $1,150 for rent, $1,000 for groceries, $300 for gas, $280 for car insurance, $245 for car payment, $225 for utilities, $200 for food takeout, $140 for phone and $58 for dental insurance. The couple doesn’t have health insurance. Ms. Vikander hasn’t been regularly contributing to savings and Mr. Smalley has been investing any additional money he has at the end of the month into his business.

Most of Erika Vikander’s income comes at the start of snowboarding season. She competed at the Freeride World Tour skiing and snowboarding competition in Andorra’s Ordino-Arcalis Mountain Resort in February 2021.



Photo:

lionel bonaventure/Agence France-Presse/Getty Images

Advice from a pro

Allan Roth,

a financial adviser and founder of Wealth Logic LLC in Colorado Springs, Colo., applauds the couple for having so little debt outside of Mr. Smalley’s business. He says their first priority should be buying health insurance.

“Health is more important than wealth,” Mr. Roth says, adding they are taking a big gamble, especially because backcountry snowboarding can be hazardous. He recommends the couple, who live together as domestic partners and so should qualify for joint health insurance under the Affordable Care Act, investigate all options including buying policies separately. For a government-sponsored silver plan after subsidies, he says, the couple could pay roughly $550 a month. They also should consult a licensed insurance broker.

Mr. Roth urges the couple to review their expenses. Any additional funds could be used to pay for health insurance and pay off debt. He suspects they might have underestimated or left out some key expenditures, like clothing, entertainment, medications or the cost of car maintenance. But with their current list of expenses, he figures they should have a surplus of about $35,000 a year to repay debt or save. They should look at their bank account and credit-card statements to help identify what discretionary spending could easily be cut out. Mr. Roth also suggests that Mr. Smalley look closely at his business investments to see which ones paid off and which ones are not worth repeating.

Their next priority should be paying off the business debt. If Mr. Smalley can continue to pay $2,000 a month for his loan, Mr. Roth says, it should be paid off in about a year and a half, including the interest.

Ms. Vikander, meanwhile, should start setting aside some of her earnings each month. She should maintain her $11,000 cash cushion and save enough additional money to buy her current car, priced at $13,000, or another used car once her lease is up in November 2022. Her last car payment is due around the same time as Mr. Smalley’s last loan payment, assuming he continues his current payment schedule and amount.

If the couple can continue setting aside $2,000 monthly once the loan is repaid, Mr. Roth says, they would have $48,000 in two years, which is more than enough for a 20% down payment on a home. If Ms. Vikander spends less on her car, they could save even more.

Because the couple currently lack access to an employer-sponsored 401(k), which would mean free money from employer-matched contributions, Mr. Roth contends that, for now, paying down debt should take precedence over retirement savings. Certainly, after buying a house, they should prioritize tax-advantaged saving for retirement, Mr. Roth says.

“The house can be enjoyed and, generally, should appreciate in price,” he says.

Ms. Ward is a writer in Vermont. She can be reached at [email protected].

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Vanguard Hits Pause on Fund Ambitions in China | Sidnaz Blog


American financial giant Vanguard Group has suspended plans to launch a mutual-fund business in China.

The Malvern, Pa., firm told staffers in recent days that it was pausing months of preparations to sell its funds to Chinese consumers. The firm had been planning to seek Beijing’s approval for the business.

The $7.2 trillion asset manager has for years aimed to bring low-cost index funds to China, a radical idea in a country where investors prize funds that pick and choose investments to beat markets. But Vanguard executives have now decided that building a meaningful presence in China’s fund industry would take longer than they expected, people familiar with the matter said.

The shift will result in a small number of jobs being eliminated.

Vanguard’s decision stands in contrast to other Wall Street firms, which are continuing a push to get Beijing’s approval to sell their own funds to Chinese consumers. Vanguard is betting that it can reach Chinese individuals another way.

Last April, Vanguard’s joint venture with Ant launched a roboadvisory service that builds portfolios around individuals’ needs.



Photo:

Qilai Shen/Bloomberg News

The firm is focusing its China strategy around a venture with financial-technology firm Ant Group Co. that builds investment portfolios for consumers. The venture fits with Vanguard’s broader ambitions to grow by providing financial advice at a fraction of rivals’ costs. Vanguard said it believes the firm can offer investors more value by delivering financial advice through the venture rather than competing in a crowded fund market.

Vanguard is taking itself out of the running for a Chinese mutual-fund license as U.S.-China trade tensions rise. The firm’s suspension of its plans makes clear that for all the allure of China’s mom-and-pop market, the world’s second largest asset manager won’t jump in at any cost.

Vanguard will have to deal with a potential complication, as it doubles down on its venture with Ant: The Chinese firm is under regulatory pressure and revamping its entire business.

“We believe there is a clear opportunity to meet the growing demand for professional advisory services in China by focusing on our joint venture with Ant at this time,” said Vanguard Chief Executive Officer

Tim Buckley.

The firm said it would maintain a team in Shanghai to support the venture, monitor the market and develop its business.


“Vanguard maintains its long-term commitment to the China market”


— Tim Buckley, Vanguard’s chief executive

“Vanguard maintains its long-term commitment to the China market,” Mr. Buckley said, “and is confident in its ability to continue leveraging its time-tested investment philosophy and approach to fundamentally change for the better how individuals in China invest.”

Since China began letting foreign firms apply for mutual-fund licenses of their own last year, major firms have tried to show Beijing they are all in.

BlackRock Inc.

has received preliminary approval to start a mutual-fund business. Firms including Neuberger Berman and Fidelity International have pending applications.

U.S. firms face significant obstacles in a market in Beijing’s grip. No foreign firms have started selling their own mutual funds to Chinese individuals. Adding another hurdle, Chinese banks and tech giants control distribution channels.

Vanguard executives have less runway than rivals to pursue overseas adventures with no chance of payoff. Owned by investors in its U.S. funds, Vanguard has to keep reinvesting for those clients and lowering the cost of investing for its shareholders.

Vanguard told major Chinese state investors last year it was returning their money and exiting the Chinese institutional business. The firm decided to shut down its Hong Kong office that mainly serviced big clients and wind down Hong Kong-listed exchange-traded funds.

Over the years, executives debated how much to commit to expanding in China.

Vanguard scored political goodwill there as an early supporter of the idea that investors seeking broad emerging-markets exposure should be in mainland stocks. In 2015, before other managers, Vanguard announced it would add China A-shares to its marquee emerging-market index fund.

Vanguard’s chief executive in roughly the decade ending 2017,

Bill McNabb,

said the firm needed to commit resources into China. Mr. Buckley, another top executive, was more cautious and would stress the need for data first to justify the costs, according to people familiar with the conversations at Vanguard.

Mr. Buckley became CEO in 2018 as political relations between the U.S. and China deteriorated. Vanguard took a narrower path in China and refocused the business around providing advice. Last April, the firm’s joint venture with Ant launched a roboadvisory service that builds portfolios around individuals’ needs. More than 500,000 users signed up within the first year.

The firm also made other decisions that went against China’s wishes.

After Bloomberg LP ramped up Chinese exposure of a major bond index starting in April 2019, Vanguard didn’t mirror the full change in funds tied to the benchmark. Vanguard took Bloomberg’s option for more limited China exposure for those funds.

A firm spokeswoman said Vanguard made the decision because of constraints in the region around currency hedging and other transactions that could add costs and tracking error for investors.

Write to Dawn Lim at [email protected]

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Cathie Wood’s ARK Finds Gains and Pain in Money-Losing Companies | Sidnaz Blog


More than half the companies in

Cathie Wood’s

five popular exchange-traded funds at ARK Investment Management LLC were unprofitable in their latest year, a characteristic that analysts say will likely add to the volatility in these funds in the coming months.

Of the 165 stocks included in ARK’s actively managed ETFs, 85 generated net losses in their latest fiscal years, according to an analysis by Dow Jones Market Data. That made the funds particularly vulnerable to dramatic swings when investors turned their backs on growth stocks in favor of shares that shine when the economy prospers.

Despite this week’s rebound in tech stocks, all five of ARK’s ETFs remain down at least 18% from their mid-February highs, trailing the Nasdaq Composite, which is off 7.3% from its Feb. 12 record.

Performance of the holdings of ARK’s five actively managed ETFs

The pain has been most acute among shares of the unprofitable companies in ARK’s funds. Those stocks have fallen on average 23% over the past month, according to a DJMD analysis of ARK’s holdings and FactSet data, while the profitable holdings are down 10% over the same period.

“These stocks are inherently more risky than the broader market,” said

Ben Johnson,

director of global ETF research at Morningstar.

A spokeswoman for ARK declined to comment. Ms. Wood, though, has taken to television and YouTube to put her investors at ease, stressing the firm remains committed to its strategy.

“We’re as excited as ever about everything we’re doing. The last few weeks hasn’t done anything except increase the returns we expect from each of our stocks to the extent they’ve come down,” Ms. Wood said in a video posted to YouTube last week that has racked up more than 700,000 views.

Among ARK’s high-profile positions are streaming company

Roku Inc.,

home-sales website

Zillow Group Inc.

and music service

Spotify Technology SA,

none of which posted a profit in their most recent annual reports. Shares of those and many other unprofitable companies span multiple ARK funds.

Teladoc Health Inc.,

for example, is included in four of the five ETFs, a combined position worth $2.3 billion. The virtual medical services provider has reported losses every year since it went public in 2015, including a $485 million loss last year.

Of the 56 stocks in the flagship innovation fund, 36 generated no earnings during their latest fiscal years, according to an analysis of the firm’s holdings. ARK’s genomics fund, which is down 5.4% so far this year, has even more exposure to unprofitable companies, with 43 of its 57 holdings reporting losses last year. In ARK’s three other funds, at least roughly a quarter of the companies represented posted no earnings last year.

Investors have long relied on valuation metrics like price-to-earnings ratios to gauge the prospects of a stock. But such metrics are irrelevant for companies that generate no profits. ARK instead relies on a mix of imagination and discounted cash-flow models premised on near-zero interest rates to justify the lofty valuations of stocks that have a big potential to grow and conquer their respective industries, like

Alphabet Inc.’s

search domination and Facebook Inc.’s moat around social media.

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Many of ARK’s “disruptive” stocks went gangbusters in 2020 during the Covid-19 pandemic. The innovation ETF jumped more than 150% last year alone, helping it triple from its 2014 debut. A flood of inflows from investors followed, allowing ARK to make even bigger bets on the next wave of revolutionary companies.

Another potential concern among ARK investors is the funds’ heavy concentration. The firm, for example, owns a 15% stake across two of its funds, worth $156 million, in biomedical products company

Cerus Corp.

The company hasn’t been profitable in more than a decade, most recently reporting a nearly $60 million annual loss.

The more an investor owns of a particular stock, the harder it is to add or sell shares without moving prices. Morningstar crunched the numbers and found that if ARK opted to sell its Cerus shares, it would take more than 52 trading days to completely exit the position to avoid materially shifting the stock price to the detriment of its own investors.

Shares of Cerus have fallen 17% over the past month. Redemptions appear to have led ARK’s funds to shed more than 2 million shares between Feb. 22 and March 9, according to Cathiesark.com, a website that tracks ARK’s trading activities, potentially exacerbating Cerus’s slide.

“That’s the No. 1 concern in portfolio management,” said Saumen Chattopadhyay, chief investment officer at wealth-management firm Carson Group, referring to concentration. “When the bubble bursts, funds like that can get caught up.”

ARK isn’t changing its approach. Executives, including Ms. Wood, have said the volatility hitting the market and their funds will be short lived. Over the past several weeks, the firm has sold more-liquid stocks to buy shares of companies in which it says it has a higher conviction, including smaller, harder-to-trade and, in several cases, unprofitable stocks. Those buys include Roku and

908 Devices Inc.,

a chemical analysis company worth just over $1 billion.

Ms. Wood, in her video last week, said the funds haven’t experienced any trading or liquidity issues.

“We are not in a bubble,” she added.

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.

and

Tesla Inc.

to pandemic winners such as

Roku Inc.

and

Square Inc.

to little-known 3D-printing firm

Stratasys Ltd.

and Israeli therapeutics company

Compugen Ltd.


CGEN 0.06%

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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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ARK Funds Fall Into a Bear Market | Sidnaz Blog


The core five ETFs of star stock picker Cathie Wood dropped more than 4% Friday.



Photo:

Alex Flynn/Bloomberg News

ARK Investment Management LLC’s highflying exchange-traded funds are firmly in a bear market following another round of steep declines Friday.

The core five ETFs of star stock picker

Cathie Wood’s

New York asset-management firm fell between 4% and 7% in recent trading as shares of technology and other fast-growing stocks continued to sell off. Those declines have pushed ARK’s funds down more than 20% from their most recent highs, meeting the traditional threshold used for determining when securities and indexes have entered a bear market.

ARK’s ETFs have plunged past the broader stock market. The S&P 500, which ARK uses as a benchmark for its own funds, is off about 5% from its Feb. 12 high.

ARK’s flagship innovation fund has been hardest hit. The $23 billion fund was off 31% from its previous high, with roughly half of those declines coming this week alone. The drops for ARK’s other funds weren’t far off. That is likely because a number of the stocks in Ms. Wood’s funds are largely exposed to the growth trade, which the market has turned on in the face of a steepening yield curve.

Some of ARK’s funds have heavy positions in companies like electric car maker

Tesla Inc.,

streaming service

Roku Inc.

and digital payments company Square Inc. All three of those stocks are off at least 28% from their most recent highs.

Some of the recent losses appeared to dislodge more investors from ARK’s funds. After two days of consecutive inflows, investors on Thursday pulled $150 million from ARK’s innovation fund and $112 million from its genomics pool.

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