SARK ETF (AXS Investments Short Innovation ETF) is a short innovation fund that attempts to achieve the inverse returns of the ARK Innovation ETF (NYSEArca: ARKK). AXS Investments set up the fund when it noticed the high demand for short positions of ARKK ETF.

Maintaining short positions can be costly especially when the market experiences a squeeze and lenders wish to be paid more to lend their shares. That issue is solved by the availability of an exchange traded fund which is much cheaper to hold.

Holding a short ETF may serve a good purpose to diversify the overall risk of a portfolio. The correlation to long-only funds is -1. Meaning that you will get the same, or similar return, but with the opposite sign.

In times of distress, inflation, and recession it makes sense to hold some short positions in your stock portfolio. An easy, cost-effective, and highly liquid way of achieving that aim is through a short ETF. The signs of a likely slowdown into recession have been around for a few months now, as we have reported

So, holding some investments that protect your downside can relieve much of the pain. It also means you don’t have to sell those long-only ETFs or stocks at the wrong time. Let’s have a close look at the SARK ETF, its characteristics, and its performance.

SARK ETF YTD performance
Source: TradingView

What Is the SARK ETF? (NASDAQ: SARK)

The SARK ETF has the objective of replicating the inverse returns of the ARK ETF. This essentially equates to being short of ARKK ETF stocks. When ARKK share prices go down you get a positive increase in the price of SARK ETF shares.

The fund attempts to match the inverse returns of 1 day for the ARKK ETF. These returns are paid back into the fund which allows for a compounding effect. The compounding effect will increase profits and losses. 

SARK ETF managers achieve short exposure to ARKK ETF daily returns by entering swap agreements with international financial institutions. These swap agreements are extremely margin efficient, meaning a low percentage of the capital SARK ETF collects is used in the swap transactions.

To offset holding cash as a margin the SARK ETF actively invests in US treasuries that investors consider as risk-free. The interest paid on these securities adds to the returns of the fund. However, they also expose investors to another risk and that is the change in interest rates.

When interest rates rise, prices of the treasury notes the fund holds will go down, creating a negative profit and loss on the fund’s NAV. From AXS Investment’s website, we see that the fund has just over 95 percent of its balance sheet in cash. However, we were unable to determine what percentage the fund holds in US treasuries.

What Is SARK ETF Shorting Exactly?

To understand what SARK ETF is taking a negative position on, we must look at the ARKK ETF’s holdings. The SARK ETF enters swap agreements for the inverse daily returns of the ARKK ETF so it’s exactly like having short positions of ARKK.

From the table below we can see the top 10 holdings of ARKK ETF, there are three main industries the fund has targeted. The breakdown by sector shows the following allocations to each industry:

SectorAllocation
Technology30.45%
Therapeutic Science19.35%
Green Mobility8.67%

Some of the biggest holdings have also produced the largest YTD declines for the fund. The table below shows the yield to date for the top ten holdings and their allocations.

StockYTDAllocation
ROKU-78.27%6.79%
Shopify-76.59%4.07%
UiPath-74.98%4.34%
Teladoc-70.42%4.50%
Block-61.20%5.47%
Intellia-58.96%4.60%
Zoom-56.71%9.78%
Exact-50.97%6.23%
Tesla-50.56%8.67%
Crispr-34.42%4.02%

We can see from the top ten holdings, and you can check the full holdings from their website, that the ARKK ETF invests in new technology, therapeutics, and other innovative companies like Tesla. However, some of these sectors, and the companies operating in them, have been hit the hardest over the past year.

This ETF has lost a lot more ground than the broader stock market or the Nasdaq index in particular which might be a good benchmark for the fund. Some of the companies ARKK ETF holds were showing signs of great promise.

However, things have turned sour for many of them, and the current economic climate is only making things worse. Companies like Roku and Shopify have shown great potential in the past to become the next Amazon. However, reality has proven them to be quite different from the early expectations.

ARKK ETF holdings
Source: ARK Funds

SARK ETF: Fund Details

Here are the main details of SARK ETF

IssuerAXS Investments
Inception Date11/09/2021
Expense Ratio0.75%
Assets Under Management$349 million
Average Daily Volume 3.75 million shares
Legal StructureOpen-End-Fund

SARK ETF Performance

The SARK ETF inception date was November 9, 2021, so we have a rather short time frame to analyze. However, during its short life, the SARK ETF has performed exceptionally well in outright terms. Which of course means that the ARKK ETF had a negative performance.

From the ETF’s inception date to the time of writing the fund has risen from its launch at $29.94 to $65.22 for a 117 percent increase. That said, SARK ETF’s all-time high was at $81.21 in May 2022, so we are still down 24.5 percent from that level.

From the daily chart below, we can see that the price of the SARK ETF is well above both the 50-day and 100-day moving averages. We also have the 50-day moving average that recently crossed above the 100-day moving average which is considered a bullish signal. 

Year To Date, SARK ETF has had a positive performance gaining 59.86 percent at the time of writing. As this ETF captures the inverse performance of the ARKK ETF this seems in line with expectations. In fact, the ARKK ETF is down 63 percent YTD. 

SARK ETF daily chart
Source: TradingView

Conclusion

Holding short ETFs as we said earlier may be an effective way in limiting the negative shocks on a stock and bond portfolio in times of financial stress. However, SARK ETF is a complex security that uses swaps and short positioning.

It is probably most suited to active investors and traders that will monitor their positions daily. The effects of swap transactions and the compounding of returns can magnify profits and losses rapidly. Always talk to your financial advisor before making any final decision, to determine what exactly suits your needs.

In general terms, securities and assets that have little or no correlation to stocks are a good way to reduce the overall risk of your portfolio. Assets such as precious metals, real estate, hedge funds, or annuities can effectively help in that intent.

Bottom Line

If you are considering holding this type of security, you may want to take advantage of a self-directed IRA. Where you can benefit from a tax-enhanced environment. Note that traditional IRAs do not allow for all types of securities to be held under these plans.

Many companies out there offer their specialized services to help you set up and run a self-directed IRA. We have selected some of the best in the industry, you can read our reviews on the top self-directed IRA companies here.

Gino D'Alessio

Gino D'Alessio is a Broker/Dealer with over twenty years experience in various OTC markets such as Bonds, FX and Derivatives. Currently a Financial Markets and Investments Writer & Analyst