In the ever-evolving world of ETFs, we often see portfolio managers use the unique creation and redemption mechanism to their advantage. One of the more interesting, yet less common, maneuvers is the “heartbeat” trade. This is where a large, often pre-arranged, creation of new ETF shares is quickly followed by a similarly large redemption. Typically, this is done to rebalance the portfolio or manage positions. However, we recently witnessed a peculiar version of this in the ARK Innovation ETF (ARKK) that’s worth a closer look.
During the week of August 11th, 2025, the ARKK ETF saw a massive influx of capital, with over $5.4 billion in creations, peaking with a staggering $2.8 billion inflow on August 14th alone. This was immediately followed by a torrent of redemptions the next week, starting August 18th, 2025, totaling over $5.2 billion.
ARKK Daily Flows ($MM)
- 8/12/2025: $1,090.34
- 8/13/2025: $1,357.94
- 8/14/2025: $2,834.71
- 8/15/2025: ($2,716.54)
- 8/18/2025: ($1,300.42)
- 8/20/2025: ($1,148.30)
Normally, a heartbeat trade of this magnitude would result in significant shifts in the underlying portfolio’s composition. An issuer might use the creation basket to bring in desired securities and then use the redemption basket to offload unwanted positions. What makes this particular ARKK rebalance so peculiar is that the portfolio’s weights remained remarkably stable throughout this entire process.
For instance, top holdings like Tesla (TSLA), Coinbase (COIN), and Roku (ROKU) saw their portfolio weights barely budge. Tesla started the period at 10.80% on August 11th and ended at 10.65% on August 22nd. Similarly, Coinbase went from 6.43% to 6.32%. This stability across the board suggests the goal wasn’t a traditional rebalance.
So, what was the likely motive? Tax efficiency.
Our assumption—and without a direct line to the portfolio management team, it’s just that—is that this was a sophisticated tax-loss harvesting maneuver. In a strong up-market, which has been the case for many of ARKK’s holdings, the fund has likely accumulated substantial unrealized capital gains. As an actively managed fund, its regular buying and selling of securities can also trigger realized gains that need to be offset.
Here’s the likely play-by-play:
- The Special Create: An authorized participant (AP), likely in coordination with ARK, created billions in new ARKK shares. This massive inflow of capital provided the fund with fresh cash.
- The Special Redeem: The following week, the AP redeemed those shares. This is the crucial step. The redemption basket likely included a large cash component. This cash gives the portfolio manager the liquidity to go into the open market and sell specific tax lots of securities that are trading at a loss. The act of selling these positions in the market is what allows the fund to formally “realize” or book those losses for tax purposes. It’s important to note that an in-kind redemption itself does not create a gain or a loss. Therefore, to harvest a loss, the position must be sold for cash.
This allows the portfolio management team to off-set realized gains from day-to-day trading with the losses from the redeemed securities, ultimately reducing or even eliminating the need for a capital gains distribution to shareholders at the end of the year. It’s a powerful tool unique to the ETF wrapper that can significantly enhance the after-tax returns for investors.
As the world of active management increasingly merges with the ETF structure, we can expect to see more of these sophisticated, tax-driven strategies. For active managers who are frequently trading and realizing gains, the ability to use in-kind creations and redemptions to manage tax liabilities is a game-changer. It’s another compelling reason why ETFs continue to be a superior investment vehicle for the end investor. While the “Peculiar Rebalance” in ARKK might look strange on the surface, it’s likely a sign of a savvy manager making the most of the tools at their disposal.
Disclosures
This material is for informational purposes only and should not be considered investment advice. All investments, including ETFs, involve risk, including the possible loss of principal. Investors should consider their investment objectives, risks, charges, and expenses carefully before investing.
This analysis was developed by the team at ETF Action. We leverage advanced AI tools to assist in the drafting and refinement of our content, based on our expert prompts, direction, and final review.
