What’s Up with the Crazy Flow Volatility at ARK’s ETFs?

Something strange has been happening to several of ARK’s ETFs recently: Assets have been spiking like blood sugar after a pumpkin spice latte.

There has been speculation about the causes, but no one, other than the unidentified traders, knows why. One explanation is that the activity is merely heartbeat trades that were used to wash taxes. Another is that a zealous bunch of retail investors wanted exposure to a few IPOs. But the most interesting theory, from the Financial Times’ Robin Wigglesworth, is that someone gamed the creation and redemption process to ultimately pocket a cool $21 million in just a matter of days. Just before the Bullish IPO in August, someone could have borrowed shares of constituent stocks that are in the ARK Innovation ETF (ARKK) and used the holdings to create about 70 million ETF shares, Wigglesworth wrote. After ARKK bought Bullish shares in the IPO, the person or group seemingly redeemed their ETF shares for the constituents, able to then sell the Bullish stock at a premium, he said.

A twist is that the same thing appeared to have happened ahead of Klarna’s Sept. 10 IPO, “with one crucial, hilarious twist … ARKK didn’t actually invest in the Klarna IPO!” Wigglesworth noted.

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If the theory is correct, it would be an uncommon approach to profiting within ETFs, said Todd Sohn, senior ETF and technical strategist at Strategas Securities. Many ETFs don’t buy stocks at the time of an IPO, he said. “This activity is happening outside the fund in the primary market through the APs/market makers; they are bearing the cost of the activity.” Other ETF shareholders are insulated from the effects of such tactics, he said.

Regardless of what’s happening, it’s interesting. “It’s an incredibly unique situation,” Morningstar principal US equity strategist Robby Greengold said. “Three of ARK’s ETFs have been swept up in these violent flow patterns that don’t really happen anywhere else. This is fascinating to watch unfold, but it’s also extremely difficult to know who’s behind it.” There is a potential downside for other investors in the ARK funds, as the ETFs significantly increased their cash allocations after the share creations.

The flow activities showed dramatic changes:

• Assets in ARKK increased by more than $3.5 billion between Sept. 8 and 12, bringing the fund to over $11 billion, coinciding with Klarna’s IPO, per the FT. That followed similar activity around Bullish’s IPO in August, when assets rocketed from just over $7 billion to nearly $13 billion and then back down to about $7 billion again.

• There were also inflows and outflows from two other ARK funds: the Fintech Innovation (ARKF) and Next Generation Internet (ARKW) ETFs. As a result, ARKF’s cash allocation went from 0.2% of assets to 5%, and ARKW’s went from 0.2% to over 2%, Greengold said. The change at ARKK was smaller, at around 60 to 70 basis points, he noted.

Low Point in the Arc: As of Friday, the data didn’t show a massive exit from ARKK, and what’s happening isn’t clear. ARK did not comment on any of the recent flow activity. “Effectively, it’s dilutive to any of ARK’s pre-existing fund holders,” Greengold said of the big fluctuations that hiked cash allocations. “That post-IPO pop wasn’t felt as strongly as it otherwise would have been.”

This post first appeared on The Daily Upside. To receive exclusive news and analysis of the rapidly evolving ETF landscape, built for advisors and capital allocators, subscribe to our free ETF Upside newsletter.