In fact, even though each of the eight ETFs ARK offered to investors in 2023 produced a positive return last year, just one — the ARK Genomic Revolution ETF — had net inflows, according to Morningstar. That $1.8 billion fund took in $49 million, Morningstar data showed.
"I think quite simply investors were very badly burned in ARK ETFs," said Nate Geraci, president of The ETF Store, an investment advisory firm specializing in ETFs, and host of the weekly podcast "ETF Prime," when asked about the outflows.
The ARK Innovation ETF, for example, gained nearly 153% in 2020 but lost more than 23% in 2021 and was down nearly 67% in 2022, according to Morningstar data. Whether ARK's ETFs can regain favor with investors is among things Geraci said he will be watching for in 2024.
"And why I think ARK is particularly interesting to watch is I view ARK as the poster child for the thematic ETF space as a whole," he said, adding that "there's been a lot made over the past year or two about the underperformance of thematic ETFs, and I think a lot of questions raised about their value in a portfolio."
ARK ETFs have "very high active share and minimal overlap with typical core holdings in a portfolio," Geraci said.
"And those are the types of ETFs that you would expect an investor to look at if they want to traffic in the thematic ETF space," he said.
Meaningful inflows into ARK ETFs would be "a good sign that the thematic ETF space is coming back to life," Geraci said.
Thematic funds should be approached "with caution," according to a May 2022 edition of the Morningstar ETFInvestor. The newsletter said the thematic fund market has expanded in recent years with funds attempting to "harness secular growth themes ranging from artificial intelligence to Generation Z."
Thematic fund investors are making a "trifecta bet" the newsletter said. Such investors are betting that they are: No. 1, picking a winning theme; No. 2, selecting a fund well-positioned to harness that theme; and No. 3, making their bets when valuations indicate the market hasn't priced in the theme's potential already. While "payouts can be meaningful," the chances of winning such bets aren't good, the newsletter said.
"I understand the appeal of ARK as a benchmark because they were the leaders in thematic investing in 2020 and 2021," said Bryan Armour, director of passive strategies research for North America at Morningstar Research Services, a Morningstar subsidiary. "Over the past three years, ARK has been a pretty good proxy for thematics flows overall."
Thematic funds aren't new, Armour said, adding that such funds have a history of being in and out of favor. He pointed to The Television Fund, a mutual fund, which, according to the Morningstar newsletter, was launched in 1948 in a bid to profit from the rapidly growing television industry.
Historically, thematics have done well when markets near "bubble status," Armour said. During such periods, "they tend to explode in terms of the number of thematic ETFs and also in terms of assets and performance," he said. Shortly afterward, however, there is typically "a significant drawdown" and investors take a few years off from thematics, Armour said.
"They've been burned, they need some time to heal before they jump back in," he said.
The ARK Innovation ETF, known by the ticker symbol ARKK, saw positive flows in 2022 "despite challenging headwinds to the performance of longer-duration equities," said Tom Staudt, ARK's president and chief operating officer, in a statement provided by a spokeswoman.
"This showed the strength of the conviction of the long-term holder base, as well as the retention of assets," Staudt said. "It also pulled forward some demand that otherwise would have been present during the strong performance of 2023 since the assets did not leave."
ARKK had net inflows totaling $1.3 billion in 2022, Morningstar data showed.
"We believe that the net flow in 2023 was in line with many technology funds as the market sorted out the interest-rate environment — often looking towards cash — and we are bullish about the prospects in 2024 for both performance and flows if we enter a falling interest-rate environment as such environments accrue to the benefit of not only fixed income but also the long-duration innovation equities, though innovation equities also retain the equity upside," Staudt said.
ARK's ETF assets totaled $15.9 billion as of Dec. 31, according to Morningstar. That was down from $34.4 billion at the end of 2020.