Amid the financial uproar, Ark Invest has found an unexpected edge. While their ETF performance stumbles, they’re spotlighting the silver lining that investors might overlook: the potential for tax benefits.
A Turbulent Journey
Ark Invest, under the stewardship of Cathie Wood, has experienced a roller-coaster in the financial markets. Their flagship product, the ARK Innovation exchange traded fund (ARKK), valued at a whopping $6.3bn, has seen a decline of more than 25% in the recent three months.
While 2020 was a year of notable success, 2022 threw a curveball with the ARKK fund plummeting about 67%. This significant dive is attributed to the U.S. Federal Reserve’s decision to hike up the rates in March 2022.
Even though the ARKK fund enjoyed a rise of approximately 17% since the start of this year, its annualized three-year return stands at a discouraging -28%.
Big names for ARKK like Zoom and Block haven’t performed up to par, overshadowing stronger performances from players such as Coinbase and Roku. Even Tesla, a consistent top holding for Ark, while surging nearly 100% this year, remains below its 2021-2022 zeniths.
The Tax Edge
Yet, even in this tumult, Ark Invest is showcasing an unusual perk to their investors: tax write-offs. Due to the substantial losses Ark has faced post the rate hike, the company has conveyed that investors may not face taxes on capital gains distributions from ARKK or other active ETFs for possibly the upcoming two years or even more.
This isn’t just about Ark’s setbacks; it’s also intricately linked to how ETFs are structured. Essentially, the colossal losses Ark’s ETFs have faced can be strategically “unfurled” over a period to counterbalance net taxable gains shared with shareholders.
The firm hinted that their projected timeline for these tax advantages, which extends up to September 2027, is rather conservative.
Wood, in a recent webinar, underlined this unique tax advantage. The losses sustained by Ark are not merely setbacks; they’re tax-loss carry-forwards, a beneficial asset to offset future gains. However, when approached for further insight, Ark remained tight-lipped.
ETFs vs. Mutual Funds: The Tax Showdown
One reason many investors are drawn to ETFs lies in their capability to manage holdings, deferring capital gains tax liabilities. Such tax benefits aren’t just a sales pitch; they offer tangible advantages over other U.S. fund types.
It’s indeed unorthodox for Ark to not only underscore the tax advantages arising from their losses but also to offer a tentative timeline for these benefits.
This approach to tax management is notably different from mutual funds. Research indicates that the method ETFs employ to handle redemptions of underlying securities results in lighter tax burdens in comparison to mutual funds.
This was evident at 2021’s end, when numerous active mutual funds grappled with significant year-end capital gains distributions, in contrast to most ETFs.
This potential for lower tax has prompted investors to steadily gravitate towards ETFs, although mutual funds still command a more substantial slice of the U.S. investment sector.
Ark Invest’s strategy is clear: even when faced with setbacks, there’s always a way to pivot and find an advantage. In the fluctuating world of finance, it’s not just about the numbers; it’s about staying agile and turning even the challenges into potential opportunities.