ARK Transparency ETF (CTRU): Should You Invest in ARK’s ESG ETF?

Cathie Wood’s ARK Investment Management has just launched its first ESG ETF, the ARK Transparency ETF (CTRU). Should you invest?

SustainFi   Updated December 15th, 2021

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What is the ARK Transparency ETF?

  • Expense ratio: 0.55%
  • Holdings: 100
  • Launch: 12/08/2021

On December 8, 2021, Cathie Wood’s ARK Investment Management debuted the ARK Transparency ETF (ticker: CTRU).

ARK Investment Management gained prominence in 2020, when its flagship fund, the ARK Innovation ETF (ARKK), surged 155%. However, ARKK didn’t do so well in 2021, dropping 25% through mid-December, and investors are withdrawing their cash.

The ARK Transparency ETF, ARK’s ninth fund, invests in the 100 most transparent companies in the world. ARK believes transparency improves company and stock performance. The fund will also have zero exposure to fossil fuels and exclude other controversial sectors like gambling.

The ARK Transparency ETF is a departure from ARK’s actively managed strategy. Instead of Cathie Wood and her team picking stocks, the passive fund will track the Transparency Index, developed by Transparency LLC using a proprietary scoring methodology.

How does Transparency LLC pick the stocks to include in the index? According to the fund’s prospectus, there are six transparency indicators:

  • Transparency standards, i.e., the existence of ten types of corporate documents like privacy standards, customer standards, diversity standards, and ethical standards, and the quality of their content. Companies with written documents get higher scores.
  • Terms and conditions. The score depends on the length of the company’s terms and conditions documents. Companies with shorter and easier to understand terms and conditions documents get higher scores.
  • Total accountability measures whether the company has been involved in certain types of lawsuits, such as shareholder class action lawsuits. Companies involved in lawsuits alleging financial or accounting fraud get lower scores.
  • Transparent cost. Companies that provide more information on prices, costs, and product details receive higher scores. (Companies that don’t sell to consumers are not rated.)
  • Truth. The truth score is based on the number of lawsuits the company was involved in over the past 12 months.
  • Trust. The trust score is based on multiple sources of corporate reputation rankings.

To be included in the Transparency Index, stocks must also meet the following criteria:

  • Publicly traded on a U.S. exchange
  • Over $1 billion in market cap
  • Pre-revenue companies are excluded
  • Nine industries are excluded (banking, chemicals, confectionery, fossil fuel transportation, mining, gambling, alcohol, tobacco, oil and natural gas)

The fund costs 0.55%, cheaper than ARK’s actively managed funds. (The ARK Innovation ETF (ARKK) costs 0.75%). You can buy it through most brokers and investing apps.

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CTRU Holdings: What’s inside the Ark Transparency ETF?

CTRU owns 100 large-cap stocks with a median market cap of $22 billion. The holdings are equally weighted at around 1% each. 84% of CTRU’s holdings are in the U.S., followed by Western European stocks. As can be expected from an ARK fund, tech companies dominate.

On December 15, CTRU’s top five holdings included semiconductor stocks Maxlinear Inc, Teradyne Inc, and Nvidia Corp, solar panel component maker Enphase Energy Inc, and HP Inc.

Generally, Ark Transparency ETF holdings can be grouped into several buckets:

  • Big tech and semiconductor stocks like Nvidia, Teradyne, HP Inc, Apple, Intuit, Amazon, and Salesforce,
  • Consumer discretionary stocks like Nike, Hasbro, Starbucks, Canada Goose, Netflix, Spotify, and Best Buy, and
  • Renewable energy and cleantech stocks like Enphase Energy, Tesla, Chargepoint Holdings, and Canadian Solar

Is Ark Innovation ETF an ESG ETF?

Sort of.

CTRU targets the G in ESG (or Governance within Environmental, Social, and Governance.) Although CTRU isn’t marketed as an environmental fund, it doesn’t own fossil fuels. Besides, many holdings are companies trying to solve climate problems, like the solar tech company Enphase Energy.

Like conventional ESG funds, CTRU excludes industries like gambling, tobacco, and fossil fuels. In fact, CTRU goes further by excluding confectionery and banking stocks. (Financial institutions are known for their lack of transparency, though sweets are probably excluded because they are bad.) Here is the full list of excluded sectors:

  • Alcohol
  • Banking
  • Chemical
  • Confectionery
  • Fossil fuel transportation
  • Gambling
  • Tobacco
  • Metals and minerals
  • Oil and natural gas

Should you invest in the ARK Transparency ETF?

ESG and transparency credentials aside, CTRU is a bet on large tech and discretionary consumer stocks. Although this fund owns more stocks than the ARK Innovation ETF (100 vs. 30), we found that ARKK’s largest holdings like Tesla were also included in the ARK Transparency ETF. So if you already own ARK Innovation, the Transparency Fund may have too much overlap with it.

The way transparency scores are calculated may reward companies that are larger and have more resources to publish transparency documents or spend on PR. Transparency scores may also penalize companies in sectors where terms and conditions are naturally longer, lawsuits are not unusual, and accounting is complex. (It is not surprising that CTRU doesn’t own many healthcare stocks.)

Although the fund is global, transparency scores will be higher for U.S. and Western European companies, so you will not really be investing globally.

It makes sense that big tech and consumer companies should have better reporting and transparency track records. However, their performance likely depends on how the U.S. consumer is doing and the interest rate environment, not so much on the length of the terms and conditions documents.

🔔 Looking for other impact ETFs? Learn more about ESG ETFs.

NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.

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