ARKF: Rate Cuts Hopes Fade, Fintech’s Rally Stalls In 2024

Coming into the yr, bond merchants have been pricing in shut to 6 quarter-point price cuts for 2024. That quantity swelled to close 170 foundation factors early within the first quarter, benefiting long-duration belongings and small-cap progress equities. The pondering was {that a} slowing financial system would ultimately roll over right into a recession, prompting the US Federal Reserve and different central banks to slash coverage charges. However agency financial knowledge prevailed, and one after the other, price cuts have been taken off this yr’s board. Not surprisingly, those self same rate-sensitive shares that had led off the market’s low in October 2023 misplaced steam. That features most of the Cathie Wooden “ARK” kind names.

I’m downgrading the ARK Fintech Innovation ETF (NYSEARCA:ARKF) from a purchase to a maintain. Shares are up modestly this yr (whole return), sharply underperforming the S&P 500’s 15% efficiency, and I see its high-growth portfolio as considerably dangerous in right now’s ‘larger for longer’ surroundings whereas technicals have turned much less sanguine.

Fewer Price Cuts Priced Into 2024, A Headwind For Speculative Development Shares

In accordance with the issuer, ARKF is an actively managed ETF that seeks long-term progress of capital. It seeks to attain this funding goal by investing beneath regular circumstances primarily (at the very least 80% of its belongings) in home and overseas fairness securities of corporations which might be engaged within the Fund’s funding theme of monetary expertise (“Fintech”) innovation.

ARKF has misplaced belongings previously six months. Whole belongings beneath administration are actually simply $893 million, down from $1.2 billion after I first analyzed the ETF. Share-price momentum has likewise slowed, now sporting only a B- ETF Grade by Looking for Alpha, in contrast with an A+ ranking 1 / 4 in the past and on the finish of 2023. The fund’s high 0.75% annual expense ratio is a substantial value, and the fund has not paid a dividend previously 12 months.

ARKF is taken into account a risky ETF given each its concentrated allocation and excessive volatility metrics previously many months. Liquidity is healthy, nevertheless, given common each day quantity of near 400,000 shares and a median 30-day bid/ask unfold of 4 foundation factors as of June 27, 2024, in line with ARK Make investments.

Wanting nearer on the portfolio, the 1-star, Destructive-rated ETF by Morningstar is concentrated on the expansion facet of the fashion field with blended publicity throughout the scale spectrum. So, the fund relies on low rates of interest for the reason that progress shares that it owns should not as worthwhile as among the free-cash-flow stalwarts within the mega-cap area. Whereas ARKF’s price-to-earnings ratio has fallen about 5 turns, it stays an costly fund with a strong progress ranking.

ARKF: Portfolio & Issue Profiles

ARKF can be fairly centered on only a handful of sectors. Data Know-how is the most important weight at practically 42% whereas Financials at 26% is one other vital obese. However most of the corporations within the portfolio match the identical “fintech” mildew – a distinct segment that continues to battle amid tight financial coverage situations.

Nonetheless, with bitcoin above $60,000, the fund’s crypto-related holdings are positioned effectively. In fact, a key threat is that traders can personal bitcoin outright in a brokerage account by way of spot bitcoin ETFs, which is totally different from after I wrote concerning the fund final December.

ARKF: A Concentrated Allocation

Seasonally, July has been ARKF’s finest month traditionally. Whereas the pattern dimension is small, simply 5 years, now we have seen robust rallies to jumpstart the second half. Volatility has tended to strike over the again half of the third quarter, although.

ARKF: Bullish July Seasonal Historical past

The Technical Take

I used to be hopeful that ARKF would proceed its robust uptrend that started in October final yr because the calendar flipped to 2024. There was a stumble out of the gate, however shares did handle to achieve multi-quarter highs by March. After notching a peak slightly below $31, shares are merely consolidating. This isn’t an outright bearish transfer contemplating that ARKF’s long-term 200-day shifting common stays upward sloping and the ETF continues to print a sequence of upper lows.

So, I don’t really feel all that downbeat about momentum regardless of the fund’s vital relative underperformance to the S&P 500. However check out the RSI momentum oscillator on the prime of the graph – it stays in a lukewarm vary between 30 and 55. Necessary assist comes into mess around $26 – the Might low and the place the 200dma will quickly come into play. $31 stays resistance.

General, with poor relative energy and first rate absolute technical developments, ARKF’s chart is blended.

ARKF: Shares Consolidation, Key Assist Close to $26, Rising 200dma

The Backside Line

I’ve a maintain ranking on ARKF. The fintech fund was unable to maintain its agency momentum off the low from October. Essentially, the portfolio might proceed to be restrained as rates of interest stay excessive versus the common of the previous five-plus years.