- Amid a tech rout that dragged the Nasdaq down 3.3%, the Ark Innovation ETF plunged 7% on Wednesday.
- ARKK’s poor performance has brought attention to the Tuttle Capital Short Innovation ETF (SARK).
- Matthew Tuttle shares how traders can use the fund, which has soared 23.74% since inception.
The new year hasn’t been kind to tech stocks.
On Wednesday, the Nasdaq fell 3.3% in its largest one-day percentage decline since February 2021. An even bigger casualty of the tech bloodbath was Cathie Wood’s Ark Invest, which saw all nine of its exchange-traded funds tumble amid rising bond yields and tightening Fed policy.
The firm’s flagship fund — the ARK Innovation ETF (ARKK) — was hit the hardest. After delivering a negative 24% return in 2021, the fund suffered a 7.1% decline on Wednesday and is now 45% below its peak in February 2021.
ARKK is not the only tech innovation fund caught in the market rout. As ETF Action CEO Mike Akins pointed out, the actively managed BlackRock Future Innovators ETF (BFTR), which focuses on small- and mid-cap companies, has fallen more than ARKK this year.
Yet, the $14.5 billion fund’s sharp drawdown has put an ETF that delivers the inverse performance of ARKK on traders’ radar. The $98 million Tuttle Capital Short Innovation ETF, which is traded under the somewhat infamous ticker SARK, ended Wednesday up 7.5% and has returned 23.74% since its launch in November.
Matthew Tuttle, the chief executive and chief investment officer of his eponymous firm, said the fund created about 1.5 million shares on Wednesday, which was not exactly its biggest volume day ever.
Tuttle received some backlash on Twitter when the fund launched with just $4.7 million in assets last year, but he wanted to make clear that he had no intention to denigrate Wood or Ark Invest.
“I’ve got great respect for them and what they do,” he said. “SARK is in no way us saying anything negative or disparaging about them.”
A hedge against unprofitable tech
Instead, he got the idea for the fund when macro tides began shifting last year.
As inflation surged to a nearly four-decade high in the US, the central bank began to double the pace of winding down its bond purchases. Most recently, Fed minutes published on Wednesday suggest that interest rate hikes may come sooner and faster than investors were expecting.
Tech stocks, especially high-growth firms with lofty valuations, tend to lag in a rising-rate environment as higher borrowing costs make it harder for companies to grow and render their future cash flows less attractive.
“What we know is that unprofitable technology companies don’t do well in that type of environment,” Tuttle said. “If you are a value manager and value stocks are tanking, you are not going to do well. You could be the best money manager in the world, you are not going to navigate that environment.”
The other impetus for launching the fund is what he sees as an unmet need for a good hedge against unprofitable tech companies. He explains that while there are inverse ETFs that short the Nasdaq, those funds are effectively shorting the FAANG stocks.
“No one ever got rich shorting those companies, it’s not a great hedge,” he said. “And it’s also not something you can hold on to for a long period of time because eventually, we know that the Nasdaq is going to snap back, we don’t know that ARKK is going to snap back anytime soon.”
To be sure, ARKK encountered similar setbacks in 2015 and 2016 before making a comeback in 2017. It slipped again during 2018’s mini taper tantrum but cemented Wood’s position as a star investor by returning a whopping 157% in 2020, according to Morningstar.
3 ways traders use SARK
In Tuttle’s view, the actively managed fund lends itself to several strategies.
Investors who own the Nasdaq in the form of the Invesco QQQ Trust Series 1 have told him that they use SARK to hedge their tech exposure. Some traders take a more tactical approach where they buy the ETF in the morning and sell in the afternoon depending on market moves. Others, including Tuttle himself, hold it as a macro bet on the shifting tides of rising rates and tightened monetary policy.
“In that type of environment, what type of hedging is going to do best? Is it hedging against high-quality companies that make money or unprofitable companies that still trade at high multiples,” he said. “To me, I’d rather be shorting Zoom and TelaDoc than Apple and Microsoft.”
Despite what appears to be the onset of a downtrend for tech stocks, investors should also examine the risks of betting against megatrends such as artificial intelligence, DNA sequencing, and robotics that could play out in the future, according to Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
“Just as a long-only approach to concentrated thematic investing comes with risks not just rewards, so is an ETF that is a bet against such an approach,” he said in an email. “Unprofitable growth companies could continue to struggle as bond yields move higher in an anticipation of the Fed raising rates. However, many of the long-term themes Ark is focused on can still gain traction over time.”
For Tuttle, recent sell-offs could signal a return to pre-Covid market levels. To prepare for that reversion to the mean, he is staying away from unprofitable tech names and loading up on “boring” stocks in the energy, consumer staples, and financial sectors.
“Speculation paid off when the Fed was injecting liquidity into the market. With the Fed not injecting liquidity and actually doing the opposite, you’re not going to be rewarded for speculating,” he said. “So you want to own defensive sectors and you want to own defensive names within non-defensive sectors.”