Ark Invest Launches Four Buffer ETFs to Shield Investors from Market Declines

Ark Invest, a prominent investment management company, has filed with the U.S. Securities and Exchange Commission to introduce four new buffer ETFs. These ETFs are designed to shield investors from moderate market declines while still offering the potential for gains. The proposed funds—ARK Q1 Defined Innovation ETF, ARK Q2 Defined Innovation ETF, ARK Q3 Defined Innovation ETF, and ARK Q4 Defined Innovation ETF—will each operate on a 12-month rolling cycle, commencing in January, April, July, and October, respectively. The management fees for these funds have not yet been disclosed.

The primary objective of these ETFs is to cap the losses of the ARK Innovation ETF (ARKK) at 50% during market downturns, while only participating in gains when ARKK rises by more than approximately 5%. This structure is intended to provide investors with a buffer against significant losses while still allowing them to benefit from market upswings.

The concept behind buffer ETFs is simple: they act as a cushion during market declines, protecting investors from some of the losses, and they also provide returns when the underlying assets rise. However, this protection comes at the cost of limiting the potential returns.

Industry analysts have noted that these ETFs are essentially a "low-calorie" version of the ARKK fund, offering investors the same exposure but with a 50% downside protection. This move is seen as a response to the growing demand for structured products that offer downside protection while still providing upside potential.

Despite the strong performance of Ark Invest's technology-themed funds this year, the company has continued to experience significant outflows. Over the past 12 months, eight of Ark Invest's actively managed ETFs have seen net outflows exceeding 300 million dollars, with the flagship fund ARKK alone losing 200 million dollars. This outflow has occurred despite the fact that all of these funds have achieved double-digit gains during the same period.

The flagship fund ARKK has risen by 50% over the past year, while the second-largest fund, ARK Next Generation Internet ETF (ARKW), has surged by approximately 80%. Both funds have outperformed the S&P 500 index since April. However, the enthusiasm of retail investors appears to have waned, with ARKK experiencing its 19th consecutive month of outflows.

The shift towards buffer ETFs is seen as a strategic move to retain existing clients and attract new investors who are seeking more conservative investment options. Buffer ETFs, which were introduced in 2018, use options to limit gains in exchange for downside protection, helping investors manage market risks.

Industry experts believe that the launch of these buffer ETFs is a logical step for Ark Invest, given the success of similar products in recent years. The company's ETF head noted that this move is aimed at providing existing clients with another investment option within the Ark product line, rather than losing them to competitors.

The market for buffer funds is expected to grow significantly in the coming years, driven by investors seeking new strategies to hedge risks and diversify their portfolios. This growth is anticipated to reach 6500 billion dollars by 2030, reflecting the increasing demand for structured products that offer both downside protection and upside potential.