On this week’s episode of ETF Prime, host Nate Geraci was joined by Cinthia Murphy, VettaFi investment strategist. They discussed the future of ARK Invest and the ARK Innovation ETF (ARKK). Afterwards, Bloomberg Senior ETF Analyst Eric Balchunas joined Geraci to break down his favorite ETF story of the year so far.

To begin, Geraci highlighted a recent article on Barron’s that he found particularly interesting. The article focused on the ARK Innovation ETF (ARKK), and looked at how the average investor return for the fund was -17%, despite it offering roughly an average of 10% year-to-date returns. Meanwhile, Geraci noted investors who bought and held an S&P 500 index fund over the same time period would have seen roughly 15% in annual returns. Investors are struggling to buy and sell the fund at the right time. So Geraci asked Murphy what she expects ARK’s future to look like.

Looking at the discrepancy with investor returns, Murphy highlighted “the importance of long-term market participation,” more so than any indictment on ARK’s investment strategy. She added that when investors exert more effort on trying to time a trade or buy out of a stock, the higher the chance is that they buy high and sell low.

Geraci then noted ARKK’s performance since the fund’s launch in October 2014 is still far lower than the Nasdaq, despite Cathie Wood claiming ARKK was ‘the new Nasdaq’ last year. Going further, Geraci raised the possibility that ARKK’s inflow momentum in 2020 and 2021 was pushing underlying share price up more than the fundamentals of the actual stocks were.

“Is this maybe the poster child for all the active managers out there who worry that transparency kills the secret sauce?” asked Murphy. She also noted that the bigger that ARKK got, the harder it became for the fund to deliver on outperformance. Even in the years following 2021, Murphy added that ARKK was still seeing strong inflows.

Some investors have moved away from the fund. Murphy saw ARKK’s $6 billion in assets under management as “more maneuverable.” ARKK may find some more traction in the future. But she assessed that “maybe there are positions that are just too big to navigate in an actively managed setup.”

Following up, Geraci pointed out that Murphy’s assessment highlights the challenges with ETFs being unable to close to new investors. He noted Cathie Wood and ARKK should be given a lot of credit for sticking with their strategies and conviction. However, Geraci questioned whether there was anything different that could have been done regarding handling mass inflows from investors.

Murphy noted that ARKK had its strongest results when the fund was not as large. She felt there wasn’t much else ARKK could have done regarding allocating such a large asset pile. Murphy added that if the fund hadn’t stuck with its disruptive theme, its value proposition would have been “dead on arrival.”

Brainstorming, she noted that the fund was engaging in frequent trading, despite the highly concentrated portfolio. Holding positions for longer may have been able to generate results. But Murphy added that was borderline impossible to do with all the cash inflows. ARKK adhered to its convictions and didn’t water down its approach. So she concluded that “success was their biggest problem.”

To close out this week’s episode, Geraci welcomed Bloomberg Senior ETF Analyst Eric Balchunas to the podcast. Geraci asked Balchunas to choose his “ETF story of the year” thus far.

With ‘Hot Sauce’ ETFs coming in as his honorable mention, Balchunas chose buffer ETFs as his story of the year. Balchunas noted that buffer ETFs can help mitigate investor worries, such as during the sell-off a few weeks ago.

Buffer ETFs continue to grow in AUM and popularity. Balchunas expected that momentum to continue. A large amount of issuers are offering buffer ETFs nowadays. But he observed that “they’re stealing money from all over the place.”

Along with annuities, structured and low volatility products, Balchunas pointed to bonds as a sector that buffer ETFs are taking money from. As for why, he noted that the Agg Index lost 13% in 2022, while stocks were down 17%. This proved to be especially punishing for investors who invested in bonds to hedge your portfolio, and may open up a case to opt for buffer ETFs more, according to Balchunas.

“If you cannot count on bonds to diversify your portfolio, well, all bets are off,” he added.