Meet the investor shorting Cathie Wood's ARKK ETF

Disruptive innovation was a recipe for meteoric growth in the last market cycle, with rockstar investor Cathie Wood synonymous with this form of investing. But all good bull markets must come to an end, and with the end of the market cycle, came the fall of the ARK Innovation ETF (ARCX: ARKK). 

Matthew Tuttle, CEO and CIO of Tuttle Capital Management, saw it coming and launched the Tuttle Capital Short Innovation ETF (NASDAQ: SARK) to short ARKK last year. 

“Any asset class, any money manager that has ridiculous performance to the upside, you know eventually they're going to give it all back.”

Unsurprisingly, the SARK has received extraordinary interest and offered returns of 114.91% since its inception in November 2021. Matthew maintains the market environment was always going to be a double whammy to the stocks in ARKK facing an overdue market correction and tightening monetary conditions.

While Matthew has faced criticism, from no less than Cathie Wood herself, of being anti-innovation, he argues innovation looks different to everyone. Case in point, he wouldn’t short the FANG stocks, despite his personal fondness for inverse strategies in bear markets. As he puts it, being innovative today, doesn’t mean the same tomorrow. There is always someone who will find a better way to do things.

I spoke with Matthew about his decision to launch SARK, an investment he views as a Swiss Army Knife product and why he has great respect for Cathie Wood and would love to meet her.

We also discussed his investment philosophy, short investing in bear markets and the three companies he would hold for the next five years.

• 0:35 - Matthew’s investment philosophy
• 5:20 - The Tuttle Capital Short Innovation ETF and the decision to short ARKK
• 13:28 - Concerns about disruptive innovation as identified in ARKK
• 15:28 - Why Matthew is focused on cash in the current market and the themes he is looking for 
• 20:25 - Companies he has identified in the current market for the FOMO ETF 
• 21:35 - What’s happening next for Tuttle Capital Management
• 23:07 The three companies Matthew would hold for the next 5 years

EDITED TRANSCRIPT

What led you to start Tuttle Capital Management and what's your investment philosophy?

I've been in financial services since 1990 and was a wealth manager for a long time. In 2008, we delegated asset management to a bunch of different money managers who were supposed to be Absolute Return. While we didn't lose as much money as the market lost, we still lost a lot more money than you would've expected with Absolute Return. One of the managers came to me afterwards and said something profound that changed my life, which was, "Hey, we saw the financial crisis coming, and we knew markets were going to have a problem but because we're a mutual fund, we couldn't go to cash. So we needed to try to figure out where else can we put our money and we put our money in the wrong places and we lost just as much as the market".

I basically said, "you know what, this stinks". If they can't do it right, do it yourself, and so we started managing money internally. Then other financial advisors started coming to us and said, "Hey, we see what you guys are doing, can you manage money for us?" I said, great, I can do that. Then in 2015, we started launching ETFs and we've never looked back.

“As far as my philosophy - my philosophy is take what the market gives you.”

So in a bear market, what the market is telling you is: be in a lot of cash and take opportunities as they come. Take profits very, very quickly, and save money for when the market turns around. And when the market turns around, buy the leading stocks and ride them up.

Do you invest in your funds?

I invest all of my money in my funds. Makes it a lot easier for me. Every once in a while, I try to do something on the outside and I never pay attention to it, but I'm laser focused on my funds all day, so all my money is in my funds.

Do you have a personal favourite out of your funds?

It all really depends on what's going on.

For a while it was obviously SARK because that was doing and SOGU, which is the other one that did really, really well. Now for a while, it looked like maybe the market would bounce a little bit, so I was putting money in FOMO and another fund I managed. Now maybe the market's not going to bounce, but I'm not going to be aggressive on the short side right now. We'll see how things play out. We have an inflation number coming out tomorrow morning that could go a long way towards determining which way the market goes.

Will you change any of your strategies off the back of that?

It depends what happens. I take a 360 degree view of everything. I'm open to all possibilities and I take it as it comes. Whatever sets up, sets up. I have no predictions.

I don't know what the inflation number's going to be. And more importantly, I don't care. I don't know what the market's going to react. So I'll wait and I'll see how the market reacts and we'll judge it accordingly.

How do your funds play different roles in portfolios?

FOMO I look at as kind of a core product, a little bit more aggressive, but it's something that can be 100% or more invested, it can be 100% cash. We can go anywhere, do anything. And that's what I like to do. I think that's important. In the States here, they always say be a long-term investor but long-term investors are getting killed at the moment. Don't be a long-term investor in a bear market.

What led you to launch the Tuttle Capital Short Innovation ETF (NASDAQ: SARK) which shorts the Ark Innovation ETF (NASDAQ: ARKK)?

There are a lot of things that led to that. We filed for it about a year ago today and there were a bunch of things that were going on.

First off, they had had a ridiculous return in 2020, and then started off 2021 doing more of the same.

“The one thing you know that never changes in markets is, reversion to the mean. Any asset class, any money manager that has ridiculous performance to the upside, you know eventually they're going to give it all back.”

We knew that was going to happen at some point. We also knew, when we were sitting there in the summer, that our market was overdue for a correction. We also knew that while the Fed hadn't pivoted at that point, it was highly likely they were going to start raising interest rates.

We knew that was going to be a double whammy to the kind of stocks that ARK invest in. The other thing I look at is from the standpoint of what products would I want. I love using inverse ETFs for a hedge. Here, our biggest inverse ETFs are inverse the S&P 500, inverse the NASDAQ. What you're doing is shorting Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Google (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT). 

This maybe works for a day or two here or there but no one ever got rich shorting the FAANG stocks. I've always wanted a better hedge. So all of those things kind of aligned. We said, “Hey, nobody's ever done this before”. We called up the lawyers, they said, "Hey, we don't see a reason you can't do it". We called up some swap dealers, they said, "yeah, we can get you swap exposure". We filed it.

Were you surprised by the uptake?

A little bit. I knew that there was a lot of demand going in. At the time we filed it, there was $US1.8 billion that was short ARKK-related. What we found when we were talking to a lot of investment banks is that they did structured products, shorting ARK for their clients, so we knew the demand was there. Again, I knew the market was due for a sell-off, the ferocity of the sell-off, maybe, was a little bit of a surprise to me. I thought we were going to do good out of the gate, I didn't realise we were going to do this good.

Cathie Wood's been vocal this year about the strategy, but has she ever contacted you about it?

No. I was at a conference that she was at and I met a couple people that worked there. It was somewhat awkward for them. So I did want to go up and introduce myself, but I decided against it. The answer is no, but I would love to meet her someday. I do have great respect for her. This is nothing against her in any way, shape or form.

So what aspects of her strategy do you like?

Not a whole lot.

“What I respect is what they've done for active ETFs. Before they came around, there was really no such thing as an actively managed ETF. Their guts, what they did with Tesla (NASDAQ: TSLA) and bitcoin, being early and holding on, I think that was all great.”

I’ve got no issue with the idea of investing innovation. Certainly, I think the way that they implement the strategy, the way that they trade... again, because I'm a trader, one of the rules that I live by is, you never average down. And they're always averaging down. Not only do I not buy something ahead of earnings, I will typically sell it unless I have a big profit in it. They’re buying more ahead of earnings in a bear market.

There are a lot of things about the strategy, the risk management, that I would question, but what they've done for the industry and just having the guts to say, "Hey, this is what we do and we're sticking with it", I have great respect for that.

Why did you choose daily swaps on ARK instead of using futures or forwards?

I don't know what the markets are as far as derivatives in Australia, but here, it's way easier to do things with swaps. We couldn't have done it with futures or forwards. We could have shorted ARK directly, but that would've created a whole host of issues. So swaps is just the path of least resistance, if you want to do something inverse here.

How have you seen investors typically using SARK?

There’s a big mix. We've got people who day trade it, we've got people who buy it when it's down, we've got people who buy it when it's up, we've got people who come up with their own innovative portfolio and hedge it with SARK, we've got people who are buying the NASDAQ 100 and hedging it with SARK, we have people who are just hedging the macro environment.

We hear from a lot of people using it in lot of different strategies which was what I wanted. It's kind of a stupid analogy, but I always looked at it as like a Swiss army knife, depending on how you're managing money, there is a use in your portfolio for SARK, and for everyone, it's going to be something different.

How do you review the outlook for disruptive growth stocks in the coming market?

“I think the outlook for any stocks right now is going to stink. I think we've got another leg down here.”

Our market popped a little bit because interest rates were coming down, commodity inflation was coming down. I think people realised all that stuff's coming down because everyone now thinks we're either in a recession or we're going into a recession. So what's worse? The Fed raising rates to stem inflation, or going into a recession? They both stink. I think we've got another leg down, at least in this bear market, before things get better. We're not seeing any leadership here in stocks. There's nothing that you can point to here yet and say, oh, this is good news.

Is there a point you think that investors wouldn't need SARK for a hedging tool?

I think SARK is always going to be a useful hedging tool looking at some of the other products out there, like inverse NASDAQ ETFs. We've got one here, SQQQ, which is three times inverse the NASDAQ, that's always popular. There's always something you can do with it. Even in a bull market, we're not going up every day. There are still people are looking to hedge. There's always going to be uses for SARK regardless of what's going on in the market.

What were some of your key concerns about the disruptive innovation companies that were identified in ARK?

I mean really, this type of environment is just toxic.

“Those are companies that have no earnings, and may not have any earnings for quite some time, so they're trading basically based on hope. And in an environment with low interest rates, where the Fed is pumping money into the economy, you can trade based on hope.”

In an environment where interest rates are going up, there's concern about a possible recession, anything that doesn't have earnings is just going to get punished severely. And multiples are going to compress. That's what you've seen happen to a lot of these companies. One thing they've said about SARK is that betting against innovation is un-American. And I've always said, not having choice is un-American, but also one person's innovation isn't necessarily another person's innovation.

So you look at some of those names and wonder, are those companies still innovative? And even if they are, innovation is fleeting. There are buggy whip companies in 1900 that went out of business when we had automobiles. There are a bunch of people in their garages trying to create a product that makes you obsolete, or trying to do whatever you do and do it better. So while you may be innovative today, you may not be innovative tomorrow. That's a concern as well. Maybe some of those companies aren't as innovative as they were in the past.

Where do you view the true opportunities in terms of innovative growth at the moment?

At the moment, the true opportunities are, unless you're very nimble, cash.

“Unfortunately, the markets just stink and if you find something that's going up over a couple of days, I can tell you, you're going to get your head handed to you.”

We're seeing it here in this market where you'll have an area, whether it's solar stocks or Chinese stocks or medical stocks, they may rally for a couple of days and everyone's, "wow, this is great." Then they have a two or three day period where they just get savaged. So again, unless you're nimble, the true opportunities right now are in cash. Unfortunately, it's not exciting, but our markets are down 20% plus. Cash isn't such a bad thing.

Are there any companies you're keeping your eye on for changes in the market conditions?

Not companies specifically, but what we're looking for is leadership. Is any industry sticking its head out and really starting to lead? And sticking its head out and not getting its head cut off a couple of days later. We're just not seeing that at this point. If dead cat bounces off, you're seeing things break out and all-time highs, and then a week later, they're at all-time lows. You're not seeing any sort of leadership here. We did have it for a while here in oil stocks, that's gone by the wayside.

I'm agnostic, I'll take it where I see it, but I'm not seeing it at this point. There's certain things that I think are more attractive, like semiconductors, for example, right now. I think energy stocks might bounce. But, again, we got CPI numbers tomorrow, you get a bad reaction out of that and forget it. Don't touch a semiconductor with a 10-foot pole if we have 12% inflation.

Can you explain how the FOMO ETF (NASDAQ: FOMO) works and how you cut through market noise?

We're doing a lot of stuff. We're looking at the market, really, minute by minute, and looking at the state of the market. So there are a lot of different holding periods you could have. You could be a position trader, where you're buying something and holding onto it for months. You could be a swing trader, where you're buying something and maybe holding onto it for a day or two, no longer than a week. And you can do intraday trader, you may buy something at 9:30, 10:00, and be out of it at 4:00.

“In a bull market, you want to do mostly position trading. You want to find the leaders, you want to ride.”

So that's what we'll do in FOMO in a bull market. Right now we're not in a bull market, so I'm not going to buy and hold onto anything. We’re looking for swing trading opportunities, we're looking for things, right now, that are beaten down and we're trying to play a bounce. We might get a bounce of a couple of percent, and then we're out, we're looking for the next bounce.

We’re doing things intraday. I'm looking at how the market's set up intraday. So today was a great example, nothing was going on today until about 2pm, and then everything started to go down. We started shorting stuff at 2pm, not because I had a negative view, it's just that was the market was telling me. I came into today thinking nothing's going to happen today ahead of CPI, 2pm things start falling through the floor, we start shorting things, and then we're out of most of those position by 4pm. We did hold a couple of things that stayed below levels we were working.

Basically, the idea is to be extremely flexible and trade based on the current market environment.

“Right now, the market environment is saying, don't hold on for long-term, be agnostic, being longer short. So that's what we're doing.”

Can you give some examples of companies you've identified through your process?

One we've held on to for, maybe four days, which is a little longer than we typically do is Micron Technology (NASDAQ: MU). It had one of the patterns we really like in a bear market which is something called an Undercut and Rally, where you're looking for something undercuts a low and then rallies back above that low. Then you use the low it rallied back over as a stop. So you've got a very close stop and you ride it up for as long as it goes. And that was a great choice for us.

We identified some of those patterns in retail stocks. We bought Dick's Outdoors (NYSE: DKS), that was up 3% or 4% today and sold it, not being negative, but I got a nice little profit. And we're going into CPI, anything could happen. So those are a couple of recent examples. We also bought the NASDAQ when it looked like it was going to run into the 50-day moving average. That didn't work. Yesterday was a really bad day here. So we've trimmed some of that. We're still holding some, but we're ready to move the NASDAQ to the short side if we need to.

What's next for Tuttle Capital Management. Would you ever a list a product in Australia?

Supply and demand. If there's demand, we will definitely do it.

I've done TV things in Korea, they love growth stuff. We're contemplating doing stuff there. I've contemplated doing stuff in the UK. Definitely if there's demand, and it makes sense. I've looked India, I've looked at Hong Kong, I've looked at the UAE. So we've looked at a lot of different things. To me, it's a borderless world. If there's something that makes sense, yeah, we definitely would do it.

Anything in the pipeline product-wise?

We just got the green light to launch a series of single-stock ETFs. Those are going to come out Thursday. It took a long, long time. The SEC was not a fan of single-stock ETFs, so it took us awhile. We're launching eight and, depending on how that goes, there could be a bunch that come after that. So that's our next thing, is single-stock ETFs.

If you had to identify three companies to hold for the next five years, what would they be and why?

I think the next five years are going to be really turbulent, I guess it would have to be boring. Apple, Amazon, and Microsoft. Not sure those are going to be the best places to be, but you're not going to wake up five years from now and be at a zero.

Any exciting ones that you'd love to hold, but not in this market?

I love what we call them the Ponzi stocks. The Affirms (NASDAQ: AFRM), the Upstarts (NASDAQ: UPST), the Digital Oceans (NYSE: DOCN). That stuff's always interesting, exciting. I have a lot of fun with that stuff. Yeah. I think those are the most fun, but at this point, all you can really do is trade them intraday. You hold onto something like that overnight and you risk waking up and seeing it's down 20% free market. But wait a one-day shift and that stuff will be good again.

Any final tips for investors?

Risk management. Be careful, anyone who's telling you, "Hey, the bear market is over. I mean, we got guys coming on TV every single day, "oh, this is the bottom. Oh, no, no, now this is the bottom. Oh, no, now this is the bottom." Just protect yourself. And be educated, understand what's going on.

“You can delegate, but be educated. Finances are way too important to just delegate to someone and assume that they've got your best interest at heart.”

Matthew Tuttle uses inverse strategies as part of his approach to bear markets. You can search for similar styles of ETF strategies in Livewire's Find Funds.