ARKF: Rate cut hopes fade, fintech rally stalls in 2024

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At the start of the year, bond traders were pricing in nearly six quarter-point rate cuts for 2024. That number rose to nearly 170 basis points by the start of the first quarter, benefiting long-dated assets and small-cap growth stocks. The thinking was that a slowing economy would eventually turn into a recession, prompting the U.S. Federal Reserve and other central banks to cut policy rates. But strong economic data prevailed, and one by one, rate cuts have been knocked off the board this year. Not surprisingly, the same rate-sensitive names that led the market in October 2023 have lost steam. That includes many of Cathie Wood’s “ARK”-type names.

I am downgrading ARK Fintech Innovation ETF (NYSEARCA:ARKF) from buy to hold. The stock has rallied modestly this year (total return), significantly underperforming the S&P 500’s 15% return, and I believe its high-growth portfolio is quite risky in the current “bull for longer” environment as technicals have become less bullish.

Fewer rate cuts estimated through 2024, a headwind for speculative growth stocks

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According to issuerARKF is an actively managed ETF that seeks long-term capital growth. It seeks to achieve this investment objective by investing under normal circumstances primarily (at least 80% of its assets) in domestic and foreign equity securities of companies engaged in the Fund’s investment theme of financial technology innovation (“Fintech”).

ARKF has been losing assets over the past six months. Total assets under management now stand at just $893 million, down from $1.2 billion when I first analyzed the ETF. Stock price momentum has slowed, now earning only a Grade B- ETF from Seeking Alpha, compared to an A+ rating a quarter ago and at the end of 2023. The fund high annual expense ratio of 0.75%. it is a considerable cost, and the fund did not pay a dividend in the last 12 months.

ARKF is considered a risky ETF given both its concentrated allocation and high volatility parameters in recent months. Liquidity is healthyHowever, given an average daily volume of approximately 400,000 shares and a 30-day median bid/ask spread of four basis points as of June 27, 2024, according to ARK Invest.

Looking more closely at the portfolio, the 1-star, negative Morningstar-rated ETF focuses on the growth side of the style with mixed exposure across the size spectrum. As such, the fund is dependent on low interest rates because the growth stocks it owns are not as profitable as some of the free cash flow stalwarts in the mega-cap space. While ARKF’s P/E has fallen by about 5 rounds, it remains an expensive fund with a solid growth rating.

ARKF: Portfolio Profiles and Factors

Morning Star

ARKF is also quite focused on only a handful of sectors. IT represents the largest weighting, at almost 42%, while financials, at 26%, represent another significant overweight. But many of the portfolio companies fall into the same “fintech” mold, a niche that continues to struggle under conditions of restrictive monetary policy.

However, with bitcoin above $60,000, the fund’s cryptocurrency holdings are well positioned. Of course, a key risk is that investors can own bitcoin directly in a brokerage account via spot bitcoin ETFs, which is different from when I wrote about the fund last December.

ARKF: A Concentrated Allocation

In search of the Alpha

Seasonally, July has been the best month historically for ARKF. Although the sample size is small, only five years, we have seen strong rallies to kick off the second half. However, volatility has tended to hit the second half of the third quarter.

ARKF: July Seasonal Bullish Story

In search of the Alpha

The technical grip

I was hoping that ARKF would continue its strong uptrend that began in October last year when the calendar flipped to 2024. There was a stumble early on, but shares managed to make multi-quarter highs by March. After peaking just below $31, shares are simply consolidating. This is not a decidedly bearish move, considering that ARKF’s 200-day long-term moving average remains up and the ETF continues to print a series of higher lows.

So, I don’t feel so negative about momentum, despite the fund’s significant relative underperformance versus the S&P 500. But let’s look at the RSI momentum oscillator at the top of the chart: It remains in a tepid range between 30 and 55. A Major support comes into play around $26, the May low and where the 200-day moving average will soon come into play. The $31 remains resistance.

Overall, with little relative strength and decent absolute technical trends, ARKF’s chart is mixed.

ARKF: Stock Consolidation, Key Support Near $26, Rising 200-DMA

StockCharts.com

The bottom line

I have a hold rating on ARKF. The fintech fund has failed to sustain its strong momentum from its October lows. Fundamentally, the portfolio could continue to be subdued as interest rates remain elevated relative to the average of the past five-plus years.

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