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A month after the Ontario Securities Commission placed a cease-trade order on all 11 ETFs offered by Toronto-based Emerge Canada Inc., most of the funds are showing negative performance over that period.

Further, most funds are significantly underperforming their category peers, according to data from Chicago-based Morningstar Inc. (This article examines the Canadian-dollar versions of the Emerge funds, but not the U.S.-dollar versions.)

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 April 30, the flagship Emerge ARK Global Disruptive Innovation ETF’s return is -18.62% over one year on a NAV basis, but year to date it’s up 13.98%. The other ARK ETFs experienced a similar rebound over the same period. But investors hoping to crystallize those year-to-date gains are out of luck until the cease-trade order (CTO) lifts.

Those year-to-date gains are largely due to performance that occurred prior to the CTO. Danielle LeClair, director of manager research with Morningstar Canada, said most of the 11 ETFs “are among the worst-performing funds for April within their categories.” And since the cease-trade order was imposed on April 6, eight of the 11 ETFs have reported negative performance (based on NAV as of May 5).

LeClair pointed out that technology funds in general saw negative returns in April, “so to some extent it’s not surprising that these funds are doing as poorly as they’ve done.” However, among the 90 Canada-domiciled tech funds tracked by Morningstar, Emerge’s ARK ETFs are at the bottom in terms of performance, she said. (LeClair said most of the U.S.-dollar funds are also in the bottom half of their peer group.)

The Emerge funds don’t look good against their category peers, either.

As of April 30, Emerge’s flagship ETF underperformed every other fund in the global equity category over a three-year, three-month and one-month period (and 99% of funds over one year). For year-to-date performance, however, the ETF shot up to an eighth percentile rank, meaning it only underperformed 8% of funds.

The other four Emerge ARK ETFs for which Morningstar provides a percentile rank had similarly poor performance over the same periods, and also saw rebounds year to date.

“When it comes to thematic funds, they tend to be outperformers over small periods,” LeClair said, citing Morningstar research. “In terms of long-term holdings, thematic funds are not great relative to other broad-based options. So any time you’re allocating to a fund like that, you would want it to be a satellite position and risk-managed. That’s why you keep these positions small within a portfolio.”

Morningstar has a negative rating on the ARK Innovation ETF, the U.S. fund upon which the Emerge ARK Global Disruptive Innovation ETF is based, and a below-average rating on ARK Investment Management, the subadvisor to Emerge’s ARK suite.

“It’s been hard to have much confidence in [ARK’s] team or their process,” said Robby Greengold, strategist with Morningstar Research Services LLC in Chicago, in an interview with Morningstar Europe in February. “The team lacks a robust approach to understanding or mitigating the portfolio’s risks.”

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

“When making investments, look at the firm and its resources outside of just the investment option that you have in front of you,” LeClair said.

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

A spokesperson for Emerge said they were unable to comment on the status of their auditor at this time, but added, “We continue to communicate directly with our investors and advisors.”

Emerge’s suite of ARK ETFs is owed more than $2.5 million in receivables from Emerge, according to the funds’ June 30, 2022, interim financial statements — an amount that had grown more than fivefold over two-and-a-half years.

What happens when a CTO lifts?

A CTO placed due to a failure to file regulatory documents, as Emerge’s is, generally will not be lifted until the documents are filed, according to National Policy 11-207.

If the CTO has been in effect for 90 days or fewer when the documents are filed, the review of the CTO will occur following the filing. However, if the CTO has been in effect for more than 90 days, the issuer must apply to have the CTO lifted even after the documents are filed.

If the Ontario Securities Commission lifts the CTO on the 11 Emerge ETFs, the new self-regulatory organization will also need to lift the trading halt.

Should investors trade immediately following the lift, or wait?

“In the case of [the Emerge ETFs], they’re not a stock and there shouldn’t be an unusual amount of volatility just because of the halt,” said Dan Hallett, vice-president of research and principal with HighView Financial Group. “I don’t think you necessarily want to or have to wait, unless there is a real question as to the ability for the ETF to keep the market price close to NAV.”

Financial advisors may want to work with affected clients to place new limit orders.

“If you’re sitting in those ETFs, you’re already in a position where you have an idea if you think there’s going to be some erosion of value beyond just the price,” Hallett said. “That’s up to each person to evaluate, and then be ready to trade” if or when the halt lifts.