Interval Funds in ETF Land

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By Cynthia Murphy

In the ETF industry, we like to think that the ETF wrapper itself is the greatest financial vehicle of all time. It is inexpensive (compared to other types of funds). It’s seamless. It’s liquid. It’s tax-efficient, unlike mutual funds. It is easily tradable and, more importantly, it is easily accessible by anyone, anywhere.

If you think everyone should have access to the markets, chances are you’re a big fan of ETFs.

The only problem with this thinking is that it makes it easy for us to overlook the importance of the fund structure itself. Dan Weiskopf @ETFProfessor I’ve said it many times before, and it rings true every time: structure matters.

We were reminded of this fact and the role structure plays in investment access and results when Cathie Wood of Ark Invest filed paperwork to launch an Ark Interval Fund. The deposit hit the pipeline and we took a collective breath. Not an ETF?!

An interval fund is a closed-end mutual fund. This means that transparency and liquidity are not its characteristics. The costs are generally higher. Access to an interval fund is not open to everyone – these funds are generally available to accredited investors and there are purchase minimums. Exit is even more limited, as there is no trading on exchanges (no secondary markets for these funds) and you may not be able to unload all the stocks you want each time a window buyout opens, so entering and exiting a position is a restriction. , controlled experiment.

An interval fund is not a matter of easy access. In fact, the traditional characteristics of an interval fund contrast sharply with those of an ETF as an open-end fund structure known to democratize market access.

But Ark’s recent move, while unexpected, is perhaps not entirely surprising. The company’s massive success, with its disruptive innovation strategies active over a short period of time, has highlighted some of the limitations of the ETF envelope itself.

Consider that the Ark Innovation ETF (ARKK), Ark’s flagship ETF, saw some $15 billion in net inflows in just 12 months at the height of the pandemic, between March 2020 (pandemic low) and March 2021. Together with their counterparts ARKG, ARKW, AKRF and ARKQ, this group of ETFs has attracted over $35 billion in this short period.

The following 11 months (to date) saw nearly $9 billion run for exits, within this group of ETFs, as performance tumbled as disruptive growth as a theme fell out of favor.

This type of demand where the creation/redemption mechanism is running at full speed to meet investor appetite raises concerns about the capacity and liquidity of the underlying assets. In Ark’s case, these concerns are particularly real as their strategies aim to invest in some of the newest and often very small companies.

The Ark Venture Fund, as detailed in its regulatory filing, will invest in publicly traded equities, but also in private and/or restricted securities as well as illiquid private names. The structure of the interval fund will, in theory, allow Ark to fish in a deeper pond in search of companies that innovate and disrupt the way the world works without having to worry about day-to-day ETF creation and redemption activities. .

For the end investor, more choice is always better than less choice. But the choices within the universe of ETFs and funds in general are rarely equal, which is why my colleague Dan Weiskopf would (again) say that structure matters.


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