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Thursday, October 2, 2014

The Thematic ARK of a New ETF Player

Reported by Neil Anderson, Managing Editor

A veteran, thematic portfolio manager just dove into the ETF world with a pair of active equity ETFs from her new shop.

In April Cathie Wood unveiled New York City-based ARK Investment Management [profile] with a focus on "disruptive innovation" across different market sectors, and this week ARK debuted its first two offerings, both thematic, actively-managed, equity ETFs: the ARK Industrial Innovation ETF (ARKQ) and the ARK Web x.0 ETF (ARKW). Watch for Wood and her team to make a push in the RIA channel as they work on getting on big broker-dealers' platforms.

"It's a process getting in to the wirehouses and we're starting to move through the process," Wood tells MFWire, adding that she and her team are also in hiring talks with "someone who has very strong relationships in the independent RIA world."

Last year, Wood left AllianceBernstein, where she had served as chief investment officer for thematic portfolios, after 12 years with the firm. Prior to that she co-founded hedge fund firm Tupelo Capital Management, and she spent 18 years at Jennison Associates (now part of Prudential Investments). Wood describes Jennison as where she cut her teeth on innovation.

At AllianceBernstein, she oversaw thematic portfolios, and the assets she managed "were concentrated in separately managed accounts," an institutional product structure. Yet at ARK, Wood and her team are focused on the actively-managed ETF product structure, which she finds particularly appealing for a thematic equity shop.

"The attraction to us is especially the tax efficiency, as well as the transparency and liquidity and relatively low cost for our clients," Wood says. "Given our style and strategy where controversy is a constant and where we use controversy to trade around positions. From a tax point of view that can be a killer in other wrappers. It's beautiful in an ETF format."

The cost of the ARK ETFs, all in, is 95 basis points, compared to the 150 to 250 bps price tags for thematic offerings Wood has worked on in the past. As for the daily transparency required within an ETF structure, Wood is not concerned.

"We don't mind doing that," Wood says. "We tend to be somewhat contrarian. We're not afraid to disclose what we're doing."

Like ARK's ETFs, ARK's analysts each specialize in a specific theme, and each theme has had its own Twitter feed for the past six months or so. The research process is open source, in a style to open source software, with information available on the ark-invest.com website. And the research process is also crowdsourced, with ARK connecting with academics (and, Wood hopes, venture capitalists) as "theme developers". These theme developers join ARK's Thursday research calls (1.5 hours per theme) and Friday brainstorming sessions (2 hours total).

Wood points to famed supply-side economist Arthur Laffer as her mentor, so another key piece of her strategy is reaching out to other folks in Laffer's orbit. Wood and her team released a white paper to those who use Laffer's research service. The paper discusses disruptive innovation and ARK's current three themes: industrial innovation, web x.0 and genomics.

Looking ahead, ARK has already filed to launch two more ETFs: the ARK Genomics Revolution Multi-Sector ETF (ARKG); and an ETF that combines the genomics, industrial innovation, and web x.0 themes into a single offering (ARKK). And Wood hinted that two more ETFs, based on two additional themes, are in the works, too. In contrast to some ETF providers who launch dozens upon dozens of products, Wood says she wants a very focused product menu, all built around themes of disruptive innovation. 

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