Cathie Wood is finally dipping her famous ETF investment fund into Europe. But the Tesla acolyte isn’t expecting conditions to be welcoming on the continent.
Wood’s ARK bought a 70% stake in European fund group Rize ETF for $5.5 million last month. The group builds exchange-traded funds around “future first” assets. For Rize, that means everything from the future of sustainable food to the development of the circular economy.
Rize managed more than $450 million across 11 ETFs as of August, according to an ARK press release announcing the deal. It's a drop in the ocean compared to ARK's management of roughly $25 billion in assets.
However, the quirks of European ETFs mean Wood is unlikely to copy and paste any strategies for success in the U.S. over to Europe—or make much money quickly. Speaking in an interview with the Financial Times published Monday, the CEO of ETF manager Ark Invest said the European market would be a “tough nut to crack.”
“We knew, as an American company, that Europe and the U.K. is the most complicated region in the world. We needed local talent and local leadership,” Wood told the FT.
Similars attract
It’s clear why Wood, whose actively managed funds focus on individual stocks rather than the typical ETF approach of tracking an index like the NASDAQ, was attracted to Rize.
The stocks in her portfolio are intensely future-focused and rely on the perception of high upside for companies well placed to capitalize on technological advances.
“We believe that the European ETF market presents a strong growth opportunity as new and younger investors continue to gain access to ETFs via the growth of digital platforms, and as active ETFs increase market share by meeting the demand for innovative investment exposures,” Wood said in her press release.
The ‘tough nut’ of European ETFs
However, there are several differences between the European and U.S. ETF markets that have had Wood tempering investors’ expectations soon after acquiring Rize.
For starters, the European market is home to 24 official languages, and while the Euro largely takes out currency risk, there are still major players like the pound and the Swiss Franc vying for supremacy. It’s a far cry from the U.S. standard of the U.S. Dollar and English language.
There are also several underlying fees and transactions when dealing with several of these European markets, which harms the amount of money in the system and makes trading more difficult.
There are also tax advantages to investing in ETFs in the U.S. as well, as they avoid cash transactions that may spark capital gains requirements, according to Invesco. Europe, however, tends to charge a flat rate on ETFs.
Finally, ETFs in the U.S. have seen strong uptake from retail investors, which make up 70% of investors and are more likely to drive weighty valuations for growth stocks. It’s no coincidence that Wood’s ARKK ETF peaked in value around the same time as the meme stock craze of early 2021.
In Europe, though, retail investors make up just 20% of investment in ETFs.
The differences have come through in market size. Over the last two decades, the U.S. ETF market has swollen from $66 billion in 2000 to $6.5 trillion in 2022, according to the Investment Company Institute. Starting from near the same point in 2005, Europe’s ETF market is now valued at just $1.4 trillion, per Refinitiv.
According to Blackrock’s iShares, ETFs made up almost a third of US equity trading in 2022, compared to less than 11% in Europe.
While these factors create a relatively hostile environment for new entrants, Wood pointed out to the FT that a quarter of the subscriptions for ARK’s research came from Europe, indicating some underlying demand in the region.
The Wood-managed ARKK ETF, one focused on innovation, soared in popularity during the COVID-19 pandemic.
Investors flocked to growth stocks like Tesla, Zoom, and Coinbase on the back of global central bank stimulus making money historically cheap and equity investing immensely attractive.
Since 2022, though, Wood and other growth investors have found it increasingly difficult to get value out of their funds as interest rates rise. ARKK’s share price is currently worth 77% less than at its peak in February 2021.
