Historically, Cathie Wood’s ARK ETFs have been among the most volatile in the marketplace. Because they invest in line with her “disruptive innovation” theme, the funds are often filled with more emerging, early-stage, high-growth potential names. These companies also usually come with real boom/bust possibilities.
Her most recent launch, however, looks decidedly different. The reason it looks different is because it’s actually looking to reduce the risk profile of Cathie Wood’s most popular ARK ETF, the ARK Innovation ETF (ARKK).
Many investors choose funds, such as ARKK, specifically because of the volatility. They want to take home run swings, and products like ARKK provide those.
The question is: Will investors show any interest in a watered-down version of one of Cathie Wood’s ETFs?
What’s inside Cathie Wood’s new ETF?
The new fund in question is the ARK DIET Q4 Buffer ETF (ARKT).
DIET is an acronym for “Defined Innovation Exposure Term.” The “T” in the name refers to the 4th quarter of the year, when the fund’s 12-month outcome will begin. ARK also plans to launch similar funds whose outcome periods begin in the 1st quarter (ARKD), the 2nd quarter (ARKI), and the 3rd quarter (ARKE).
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Like other buffer ETFs, the new fund will use ARKK as its core portfolio position and overlay an options strategy. That strategy is designed to limit downside exposure. The tradeoff, however, is that it also limits upside potential.
Essentially, ARKT is a strategy that should substantially reduce ARKK’s risk profile and limit some of the fund’s tail risk.
How will ARKT’s buffer strategy work?
Each of the hundreds of buffer ETFs out there looks and works slightly differently. ARKT is no exception.
Here are the key things to know about ARKT:
- It will work over a 12-month outcome period. In order to experience the full downside buffer and upside cap, investors need to hold the fund from the first day of the outcome period to the last. Anyone buying or selling ARKT between those dates may result in different returns.
- ARKT is designed to provide a 50% downside buffer on any negative performance over the 12-month period.
- There is a 5% upside hurdle. That means if ARKK’s performance is between 0% and 5%, ARKT will not see any of that positive return. ARKK needs to return more than 5% in order for ARKT shareholders to experience a positive return.
- ARKT will see 50–80% upside participation rate after the hurdle. The exact rate will be determined based on market conditions at the beginning of the outcome period.
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Here are a few examples of what ARKT’s return scenarios could look like.
- Downside Buffer: Example: if ARKK loses 30%, ARKT should only lose 15%.
- The loss protection begins immediately and should be 50% of any negative performance.
- Hurdle: Example: if ARKK gains 3%, ARKT’s return should be 0%.
- Any gains between 0-5% will not be experienced by ARKT shareholders.
- Upside Participation: Example: if ARKK gains 25%, ARKT should gain 12.74%.
- After the 5% gain in ARKK, ARKT will capture 50-80% of gains. ARKT’s upside capture rate from Q4 2025 through Q4 2026 will be 63.72%, per the fund’s website. In this instance, (25% – 5%) * 63.72% = 12.74%.
What’s the overall takeaway? Expect smaller losses, smaller gains and less volatility when compared to a direct investment in ARKK.
Which investors should consider buying ARKT?
It would seem that the clear target audience for ARKT would be people who want to take advantage of the next-gen innovation theme but don’t necessarily want the volatility that comes with it.
In its fund explainer video, Rahul Bhushan, ARK Global Head of Investment Products, notes:
…investors can take advantage of the same research, the same transformational companies and the same potential for exponential growth, but you’re doing it with a structure tailored to your risk tolerance and return objectives.
Buffered ETFs, he says, are designed to be a complement, not a replacement, for an existing ETF portfolio.
In that sense, ARKT and other buffered ETFs make for solid risk management tools. It allows investors to capture a theme or segment of the market while reducing or eliminating some of the tail risks that can spook investors into emotional decision making mistakes. Buffer ETFs can fit into almost any portfolio, but especially those where the investor wants to limit volatility.
Key Takeaways:
- ARKT is a buffered ETF built around the ARK Innovation ETF (ARKK).
- It’s designed to reduce downside risk by half with a cap on upside returns.
- ARKT provides exposure to the disruptive innovation theme but with a structure designed for managing individual risk & return objectives.
Final thoughts: Cathie Wood & ARK pivot to attract a new audience
Over the years, the ARK ETFs have experienced some dazzling highs and some depressing lows, but one thing has remained constant—high volatility. Investing in companies with home run potential requires an iron stomach to ride out the highs and lows.
ARKT should appeal to investors who want to participate in the innovation theme but lack the iron stomach.
It’s an interesting addition that could ultimately attract a whole new set of investors, but it’ll probably take some work to get there.
