Emerge ETFs rebound as cease-trade order and firm wind-down continue

More than three months have passed since all 11 of Emerge Canada Inc.’s ETFs were placed under a cease-trade order by the Ontario Securities Commission (OSC). During the cease-trade order, the funds’ custodian, RBC Investor Services, has been reporting a daily net asset value (NAV) for each ETF.

As of June 30, the flagship Emerge ARK Global Disruptive Innovation ETF’s return is 12.02% over one year on a NAV basis, and a whopping 34.94% for the year to date, according to data from Morningstar. (This article examines the Canadian-dollar versions of the Emerge funds, not the U.S.-dollar versions.)

The Nasdaq Composite index had its best first half in 40 years, posting a 31% gain for the year to June 30.

The other five ARK ETFs also posted strong returns on one-year and year-to-date bases, with YTD performance ranging from 18.47% to 41.95% as of June 30.

However, five of the six ARK ETFs have negative double-digit returns for the three years to June 30.

Swings of this nature are to be expected when investing in technology, LeClair said.

“These funds are a type of ‘up and down’ strategy — that’s the thing with thematics,” she said. “And tech is thematics on overdrive, because it’s just such a volatile sector.”

LeClair said further volatility could result from the July 24 special rebalancing of the Nasdaq 100, which is taking place in an effort to address the outsized gains from the index’s seven top names.

“You’ve got a lot of indexes and ETFs that will have to rebalance as well, so that could present some challenges for strategies like [the ARK ones], where this kind of market movement could really impact things,” she said.

Performance data for Emerge’s five EMPWR ETFs is limited because the funds launched in September 2022. As of June 30, two of the ETFs are among the worst 10% of performers in their category year to date, two are among the worst 40%, and the remaining fund is in the top 30% of its category, according to Morningstar.

Emerge Canada Inc. declined to comment.

The U.S. versions of the five EMPWR ETFs were delisted after close of trading on July 7, after Emerge ETF Trust announced last month that the funds would liquidate on or before July 14.

Because the 11 ETFs remain untradeable, LeClair suggested investors could restructure their portfolios to diversify away from the exposures provided by any Emerge ETFs owned.

“If anyone in these strategies does have a financial advisor, I would be asking the financial advisor how to offset [the exposure] within the spectrum of my strategy,” she said.

However, LeClair said her data shows many non-tech fund managers are beginning to invest in tech names, so it’s important to examine a fund’s holdings to ensure the portfolio isn’t inadvertently doubling up on exposures.

Timing for when investors may gain access to the Emerge ETFs remains unclear.

Emerge’s auditor, BDO Canada LLP, resigned in November and Emerge hasn’t found a new one. As a result, the fund manager missed its March 31 deadline to file audited annual financial statements, which led the OSC to impose a cease-trade order on all 11 Emerge ETFs on April 6.

On May 11, the OSC suspended the registration of Emerge Canada for capital deficiency, stating that it was likely deficient at some point prior to Sept. 30, 2022.

The OSC permitted Emerge to conduct an orderly wind-down of its current business, which may include winding down the 11 ETFs. The regulator also is allowing Emerge to arrange for another firm to assume responsibility for the 11 ETFs, should that be possible.

As reported by Investment Executive in April, Emerge’s six ARK ETFs were owed more than $2.5 million in receivables from Emerge as of June 30, 2022 — an amount that had grown more than fivefold over two-and-a-half years.

The OSC’s May decision revealed that receivable had reached $5.5 million, which represents about 5% of the assets held in the ARK ETFs as of May 10.