Stay informed with free updates
Simply sign up to the Exchange traded funds myFT Digest — delivered directly to your inbox.
Cathie Wood’s Ark Investment Management has a new pitch to investors who might be concerned by the asset manager’s huge losses owing to rising interest rates — think of the tax write-offs.
Wood’s flagship investment product — the $6.3bn ARK Innovation exchange traded fund, known as ARKK — is down more than 25 per cent over the past three months, according to Morningstar.
After an exceptional 2020 and despite being up about 17 per cent since January 1, ARKK has generated an annualised three-year return of -28 per cent. That is largely owing to a catastrophic 2022, when it plunged about 67 per cent.
Because Ark’s strategies have lost so much money since the US Federal Reserve started raising rates in March 2022, the company is telling investors that they are unlikely to incur taxes on capital gains distributions via ARKK and Wood’s other actively managed ETFs for at least the next two years.
“This means that current and future shareholders of ARK ETFs can remain invested in disruptive innovation in a compounded fashion, without being taxed, for potentially two more years or longer,” said an Ark research note by director of financial reporting and fund accounting Rob Kamentsev.
The expected tax relief has to do both with the scale of Ark’s losses and the structure of ETFs, which hold securities similar to mutual funds but trade on exchanges similar to stocks and benefit from separate tax treatment.
In effect, the billions of dollars in losses Ark’s ETFs have sustained since early 2022 can be “released” over time to offset net taxable gains distributed to shareholders, according to Wood’s company.
Ark said in its Thursday quarterly fund webinar that its December 2025 estimate was a conservative one, and that its capital losses could be sufficient to offset tax liabilities as far out as September 2027.
Several big holdings for ARKK, such as Zoom and Block, have been down this year, offsetting stronger performance by the likes of Coinbase and Roku. While perennial top holding Tesla is up nearly 100 per cent year to date, its stock is still well below its highs of late 2021 and early 2022.
Wood noted on Thursday’s webinar that she thought the potential to save on taxes offered by her company’s ETFs was underappreciated.
“I don’t think many people understand what an asset we have in terms of those tax-loss carry-forwards,” Wood said.
Ark, which did not report any income or capital gain distributions in 2022 after doing so in 2021, did not respond to requests for additional comment.
One of the main draws of an ETF for investors is its ability to manage holdings to defer capital gains tax liabilities. ETF providers routinely tout the various tax advantages of their product over other US fund types. Ark’s decision to broadcast the tax advantages of its losses while offering up an estimated timeline for tax benefits is less common, even for a group whose founder is known to make bold predictions.
“They are aiming for transparency, but they are making forward-looking projections — that’s abnormal to see in asset management,” said Todd Rosenbluth, director of research at the VettaFi consultancy.
“The specific timing and putting a more positive spin on the challenging historical performance stands out relative to other ETFs.”
Research has shown that the ETF’s mechanism for handling requests to redeem underlying securities leads to lower tax burdens than mutual funds. This phenomenon was most recently on display at the end of 2021, when numerous active mutual funds faced sizeable year-end capital gains distributions — sometimes more than 20 per cent of net asset value — while for most ETFs the figure was 1 per cent or less.
The prospect of paying less in taxes has been a driving factor for investors, who have steadily been putting money into ETFs while pulling out of mutual funds. Even so, mutual funds collectively continue to hold a much larger piece of the US investment pie than ETFs.
Read the full article here