ARK-linked ETPs in focus, structured notes rattled following sell-off

As market analysts speculate that faltering ARK thematic exchange traded funds (ETFs) which are having a rough start in 2022 could trigger the next structured products upheaval, SRP spoke to Oktay Kavrak (pictured), product strategist at Leverage Shares, on the recent launch of the firm’s new trackers and long/short leveraged ETPs tracking ARK ETFs.

For the first time, European investors can access three of ARK’s thematic strategies, including the ARK Innovation (ARKK) ETF, ARK Next Generation Internet (ARKW) ETF and ARK Genomic Revolution (ARKG) ETF using the ETP wrapper – the launch in mid-December came on the heels of a downward trend that began in Q4 2021 and has continued into 2022.

Investing in disruption is never a smooth ride - Oktay Kavrak 

Ark Invest’s actively managed flagship Ark Innovation Fund (ARKK) hit today (10 January) its lowest level since the beginning of the year (down 11.75% YTD) shedding 48% of its value since its peak on 12 February 2021, the decline marking its worst drawdown since inception in 2014. The ARK Next Generation Internet ETF (ARKW) is also down 11.5% YTD/ almost 45% from its highest level in 2021, while the ARK Genomic Revolution (ARKG) ETF has shed 17.5% of its value YTD/53% from its highest level in 2021.

The top holdings on Ark’s ETFs have been on the red since the beginning of the year including Tesla (down 15.8% YTD), the best performer in 2021.

According to Kavrak, LeverageShares as an issuer has no view or position on the future performance of Ark’s funds but noted that the gap between performance of growth versus value stocks is as wide as ever.

“Whenever talk about inflation/rising rates creeps up, non-profitable growth companies are usually hardest hit,” he said. “Two of Ark’s biggest funds, ARKK and ARKW, are suffering from exactly this – given the overlapping stocks in the two funds. That said, investing in disruption is never a smooth ride.”

In-demand

The firm’s recent launch is aimed at making “UK/EU investors finally access some of the most in-demand strategies in recent years getting leveraged, short, and delta-1 exposure”.

Bullish dip-buyers can invest in the 3x long ETPs to express short-term bullish conviction around major news or events, like earnings releases; the bears (or hedgers) might consider the 3x short versions to hedge existing exposures to some of the most popular tech stocks like Roku, Zoom and Coinbase with a single trade – or simply go ‘short’; while the long-term believers can simply buy the pure trackers for one-to-one exposure.

“The ETP wrapper means that ARKK, ARKW, and ARKG can - for the first time - be accessed via a normal brokerage on this side of the pond for as little as $5. It’s all about expanding the toolset for experienced market participants,” said Kavrak.

“We purchase the underlying assets and issue ETPs that are fully backed with Ark’s ETFs or cash - in the case of inverse ETPs. The ETPs can be offered in multiple countries for the first time as they are Priips compliant and have key information documents [KIDs].”

Despite the sluggish performance of the ETFs, margin debt levels have been increasing nearly every single month, which indicates a clear appetite for access to leverage, according to Kavrak.

“We offer our lineup of leveraged and inverse ETPs so that sophisticated market participants can express their convictions without the need of a margin account and be protected from losses that exceed the amount invested,” he said.

Structured products

As opposed to structured products, the ETPs physically own the underlying ETFs, so no swaps or derivatives are used to gain exposure.  

“The ETP structure is perfect for expressing such views, as unlike stocks and ETFs, investors can take a short or long view without risking losing more money than they invest. Furthermore, gains can far exceed any positive momentum in the asset price if they choose to leverage upwards,” said Kavrak.  

SRP data shows that the structured notes linked to ARK’s ETFs, which feature defensive barriers of between 10% and 50%, are close to or have already breached their downside barriers.

SRP data also shows that the 12 products maturing in Q1 are on track to deliver losses to investors – it remains to be seen if products expiring later on this year will have the same fate or will manage to bounce back and return at least the capital invested.

There are 144 structures maturing between Q2 and Q4 2022 with a value of US$300m.

The most featured ARK ETFs in the structured products market include the ARK Innovation ETF which appears in more than 500 structures worth US$898m, followed by the ARK Genomic Revolution ETF (66 products/US$119m), ARK Fintech Innovation ETF (14 products/US$18.5m), ARK Next Generation Internet ETF (eight products/US$41.8m), and ARK Autonomous Technology & Robotics ETF (three products/US$35.5m).

Most of these were sold in the US market (482/US$919m) via structured notes with reverse convertible, autocall and worst-of payoff profiles. The main provider of these notes is J.P. Morgan (237 products/US$499m).

Leverage Shares now has 145 ETPs, offering access to top US stocks such as Tesla, Microsoft, Meta, and Apple. According to FE Analytics, four of Leverage Shares’ ETPs appeared in the top 10 best-performing ETFs of 2020.