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 rate cuts of nearly six quarter points for 2024. That number rose to nearly 170 basis points at the start of the first quarter, benefiting long-dated assets and stocks small-cap growth. The idea 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 solid economic data prevailed, and one by one, rate cuts were knocked off the board this year. Not surprisingly, the same rate-sensitive stocks that had led the market in October 2023 have lost momentum. This 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 risen modestly this year (total return), significantly underperforming the S&P 500’s 15%, and I think its high-growth portfolio is somewhat risky in the current “higher for longer” environment as technicals have become less optimistic.

Fewer rate cuts expected 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 lost assets over the past six months. Total assets under management now stand at just $893 million, down from $1.2 billion when I first looked at the ETF. Stock price momentum has slowed, now earning just a B- Grade 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’s a considerable cost, and the fund did not pay dividends in the last 12 months.

ARKF is considered a risky ETF given both its concentrated allocation and the high volatility parameters of recent months. Liquidity is healthyhowever, given an average daily volume of nearly 400,000 shares and an average 30-day 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: portfolios and factor profiles

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.

Still, with bitcoin above $60,000, the fund’s cryptocurrency holdings are well-positioned. Of course, a key risk is that investors could own bitcoin outright in a brokerage account via a spot bitcoin ETF, 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, just five years, we saw 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 all that 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. Major support comes into play around $26, the May low and where the 200-day moving average will soon come into play. $31 remains resistance.

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

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

Stock Charts.com

The bottom line

I have a hold rating on ARKF. The fintech fund failed to maintain its solid momentum from the October low. Fundamentally, the portfolio could continue to be tight as interest rates remain elevated relative to the average of the past five-odd years.

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