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Today’s September CPI print was widely panned by analysts as a do-or-die moment for the few battered bulls that still remain in this market. Well, with inflation for the month of September again printing at scorching-hot levels, the market is predictably tanking along with that symbol of post-COVID excesses – Cathie Wood’s ARK Innovation ETF (ARKK). But while the ARKK ETF has breached its year-to-date lows, its nemesis – the AXS Short Innovation Daily ETF (SARK) – is still quite a distance away from its May highs. Let’s try to explain this discrepancy.
U.S. Sep. Core CPI (MoM): 0.6%, [Est. 0.5%, Prev. 0.6%]
U.S. Sep. Core CPI (YoY): 6.6%, [Est. 6.5%, Prev. 6.3%]
U.S. Sep. CPI (MoM): 0.4%, [Est. 0.2%, Prev. 0.1%]
U.S. Sep. CPI (YoY): 8.2%, [Est. 8.1%, Prev. 8.3%]#US #inflation $USD— CN Wire (@Sino_Market) October 13, 2022
To wit, the core CPI printed at 6.6 percent in September on an annual basis, above the 6.5 percent print that was expected. Moreover, the headline inflation computed at 8.2 percent during the month on a year-on-year basis, again above the 8.1 percent print that was expected. As a result, the yield on the 10-year US Treasury is again knocking on the 4 percent handle, imbuing additional strength to the US Dollar and pressuring equities and ETFs, including the ARK Innovation ETF (ARKK).
As an illustration, Cathie Wood’s ARK Innovation ETF is currently trading at $34.03, just a spitting distance away from its 52-week low of $33.77. If the ETF manages to close at its current price, it will have made a new year-to-date low on the closing price basis. So far this year, the ARKK ETF is down around 65 percent.
On the flip side, the anti-ARKK ETF, that is, the AXS Short Innovation Daily ETF (SARK), is currently trading at $67.57, substantially below its year-to-date high (on a closing price basis) of $77.40. This is a troubling development as the SARK ETF is widely panned as the perfect hedge against the ARK Innovation ETF.
It seems that the intrinsic structure of the SARK ETF is responsible for this chronic underperformance. The AXS Short Innovation Daily ETF aims to achieve the inverse 1-day returns generated by Cathie Wood’s flagship ARK Innovation ETF. This is done by entering into a series of swap agreements with eligible counterparties. However, since the SARK ETF compounds its returns daily, small incremental moves have a higher impact on the ETF’s price as compared to sharp reversals, which have been the norm ever since the market started to fixate upon capturing the Federal Reserve’s much-anticipated dovish pivot. This might explain why the SARK ETF continues to underperform the ARKK ETF.
So, what happens next? Well, the ARK Innovation ETF is likely in for additional losses. In fact, such has been the magnitude of the ARKK ETF’s underperformance this year that Cathie Wood was forced to pen a public letter to the Federal Reserve earlier this week, slamming the apex monetary institution’s fixation with the CPI report, which according to Ms. Wood, incorporates lagging indicators.
How low do you think the ARK Innovation ETF can tumble this year? Let us know your thoughts in the comments section below.
