Cathie Wood’s Ark Investment Management is making waves in the ETF market with the launch of four new funds designed to offer downside protection for its flagship ARK Innovation ETF (ARKK). These ‘buffer ETFs,’ as they’re being called, aim to limit losses in ARKK to a maximum of 50% over a 12-month rolling period. However, there’s a catch: investors will only participate in ARKK’s gains if the underlying fund rises more than approximately 5% during the same timeframe.
This strategic move by Ark signifies its entry into the burgeoning buffer ETF market, a space gaining popularity as investors seek to mitigate risk in volatile markets. The new ETFs, ARKI, ARKJ, ARKL, and ARKM, will each cover a three-month period, starting in January, April, July, and October respectively. This approach contrasts with other recently launched buffer ETFs that reset daily, offering a different risk-reward profile.
Bloomberg Intelligence senior ETF analyst Eric Balchunas aptly described the new offerings as ‘Diet Ark,’ highlighting the trade-off between reduced risk and capped upside potential. He suggests that investors seeking a less volatile but still growth-oriented investment are likely the target audience for these new funds.
The timing of this launch is interesting, considering the recent market turbulence affecting Ark’s funds. The firm’s significant exposure to Tesla, a stock heavily impacted by the ongoing feud between Elon Musk and President Donald Trump, has led to considerable volatility in the past. These buffer ETFs are clearly designed to provide a safety net for investors during such periods of uncertainty.
Ark’s flagship ARKK ETF, known for its focus on disruptive innovation, experienced a substantial 66.9% pullback in 2022. The new buffer ETFs aim to mitigate the impact of such dramatic drops, offering a potentially more palatable investment option for risk-averse investors. However, the limitations on upside participation should be carefully considered before investing.
The ARKK ETF itself was trading at $70.44 at the time of the article’s publication, down slightly for the day. The launch of these new buffer ETFs represents a significant development in the ETF landscape and a response to investor demand for more controlled risk exposure in growth-oriented strategies. The long-term success of this strategy remains to be seen, but it undoubtedly reflects a shift towards more sophisticated risk management tools within the investment community.
