Cathie Wood’s ARK Invest is back on the outflow grind, and some experts are questioning why.

ARK brought in $3.7 billion across 13 of its US ETFs earlier this month, but recently, its offerings have seen massive outflows. The company’s flagship funds, like ARKK and ARKW, lost billions in assets last week following record inflows. Its bitcoin ETF — the ARK 21Shares Bitcoin ETF (ARKB) — saw more than $75 million leave on Wednesday despite gaining nearly $200 million in inflows earlier this year, according to the boutique firm Farside Investors. The losses, especially in ARKB, could be due in part to institutional activity as larger investors begin to enter the crypto marketplace.

“Institutions are always moving money around… I think it was just [institutions] positioning for what folks think will be the next leg up,” said financial consultant Tyrone Ross Jr. “ARK is always incredibly active and open about what they’re selling, what they’re buying, so I think it was more bark than bite.”

Cathie’s Ark

The source of ARKB’s woes might be industrywide after a week in which total bitcoin ETF outflows topped $1 billion. But some experts pointed to “heartbeat trades,” a term that describes quick inflows and outflows that help defer long-term capital gains, as a probable culprit. Dave Nadig, director of research at ETF Database, wrote on X that such trades are “a well understood part of ETF tax efficiency,” but that ARK’s recent volatility “is probably a record.”

The rapid sell-offs could also be institutional investors “shak[ing] out the weak hands,” Ross said. “What all of us crypto hippies wanted as a space, we wanted all the big institutions in,” he said. “When they’re in, this is what they do. They manipulate the market.” The ones really selling are longtime bitcoin investors who have owned it for a decade plus, Ross added, who sell simply to “buy it all up” again. Other recent outflows for ARK’s products include:

• The ARK Innovation ETF (ARKK), which saw four straight days of outflows totaling $5.3 billion last week.
• The ARK Next Generation Internet ETF (ARKW), which saw $715 million in outflows over the same period.

A Drop In the Ocean. Bitcoin swings are unlikely to influence market dynamics going forward, Ross said. “This is what the [crypto] space is right now: It’s $4 trillion. [The outflows are] a pimple on the elephant’s butt, if you look at it in terms of the size of capital markets,” he said. “It’s still susceptible to this kind of stuff.”

There’s a new sheriff in SEC town, and her resume doesn’t look much like those of her predecessors.

The Securities and Exchange Commission on Thursday announced that Margaret “Meg” Ryan (no, not that one, and she’s probably heard people point it out enough) will be the director of its Division of Enforcement beginning Sept. 2. What’s unusual about her background is that it’s heavy on military law rather than securities law. From 2006 to 2020, she was a judge in the US Court of Appeals for the Armed Forces, and she currently lectures on military law and justice at Harvard University Law School.

“I look forward to joining the commission in its important work to ensure that the division is true to the SEC’s mission in taking action on behalf of investors harmed by those who break the securities laws and providing an effective deterrent against fraudulent and manipulative activities in our financial markets,” Ryan said in a statement.

Enforcing Priorities

Under SEC chairman Paul Atkins, the regulator is focusing less on so-called “regulation by enforcement” of big firms and more on individual investor protection, or pursuing cases in which people are defrauded. Ryan “is fulfilling a critical role,” Atkins said in the announcement, and “will lead the division guided by Congress’ original intent: enforcing the securities laws, particularly as they relate to fraud and manipulation.” Ryan replaces Sam Waldon, chief counsel for the enforcement division, who has been serving as acting director and will return full time to the chief counsel role.

The appointment is unusual, but not necessarily a problem for the SEC, according to Igor Rozenblit, managing partner of Iron Road Partners:

• Usually, directors have backgrounds in some area of law enforcement, securities law or both.
• One way to address a potential gap in related experience is to have a highly experienced deputy director or counsel, and it’s unclear who might fill that role and how much their expertise will be used.

Curriculum victory: Ryan’s resume includes graduating first in her class from Notre Dame Law School, partnerships at two law firms and a clerkship under US Supreme Court Associate Justice Clarence Thomas. “Securities is a very complex area. If you haven’t really lived it, you might tend to favor simpler cases versus more complex cases,” Rozenblit said. But, “the last administration also appointed people to senior positions that didn’t have the exact backgrounds they needed,” he added. “We should all give her the benefit of the doubt.”

Fixed-income ETFs are booming. They’re also becoming more tax-efficient than ever.

Fixed-income strategies garnered more than a third of total ETF sales in the first half of this year and recently surpassed $2 trillion in AUM. The latest firm to capitalize on the explosion is the boutique issuer F/m Investments, which recently launched a new series of passive, fixed-income funds designed to minimize dividend tax drag. It’s the latest effort to capitalize on widespread adoption of fixed-income ETFs that are tapping into institutional investors, said Todd Rosenbluth, head of research at VettaFi. “Institutional adoption of fixed-income ETFs has accelerated as the liquidity has improved,” he said.

In the Rotation

F/m’s funds work by investing in other, similar ETFs that provide exposure to a buyer’s selected bond type, rather than receiving that income as a distribution. Once the original underlying ETFs have paid out their dividends, the two funds will rotate back into them, minimizing the taxes involved in distributions. Tax efficiency in ETFs is nothing new, but F/m’s funds bring even more tax benefits, said Alex Morris, CEO of F/m. The idea for the funds came about because the firm’s institutional investors wanted a product that wouldn’t keep giving them their money back, with the result being a product that would eliminate the distribution altogether. “Distributions are sort of a messy thing,” Morris said. “They’re not investor-friendly, they’re issuer-friendly … Practically, most investors aren’t really served well by that.”

The two funds are:

• The F/m Compoundr High Yield Bond ETF (CPHY), which prioritizes investment-grade bond exposure.
• The F/m Compoundr U.S. Aggregate Bond ETF (CPAG), which invests in high-yield bonds.

Looking to Europe. A similar set of funds is the Global X PureCap suite, which work around regulated investment company tax rules by “being creative” in providing exposure to different sectors, Rosenbluth said. These tax rules are what have prevented widespread adoption of what Europe calls accumulating share classes, which have been around for decades and let income build up in the fund by investing income in more shares. “America just forgot to do that, and we think we fixed that,” Morris said.