ARKF: Bullish Tech And Crypto Momentum Into 2024

It was a stellar year for tech stocks. The Information Technology sector rose 55% in 2023. Along with the Communication Services and Consumer Discretionary sectors, there were just three S&P 500 areas that beat the overall index. Traditional bank stocks lagged, perhaps underscored by the March 2023 regional banking crisis. Interestingly, intermediate-term Treasury notes finished about unchanged last year amid a volatile interest rate environment. As a result, crypto and once hot fintech startups were topsy-turvy before raging higher into year-end.

I have a buy rating on the ARK Fintech Innovation ETF (NYSEARCA:ARKF). While its valuation is lofty, technical momentum is strong after a late-year jump.

2023 S&P 500 Sector Performance: Tech Shines, Financials Post a +10% Return

ARK Invest states that ARKF is an actively managed ETF that seeks long-term growth of capital. 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 that are engaged in the Fund’s investment theme of financial technology (“Fintech”) innovation.

ARKF is a moderate-sized ETF with nearly $1.2 billion in assets under management and it does not pay a dividend as of December 29, 2023. Share-price momentum has been remarkably strong over the last nine weeks, and that is evidenced by ARKF ranking number 1 out of 86 in its ETF subclass, per Seeking Alpha’s ETF Grades. With a high 0.75% annual expense ratio, this high-volatility fund is pricey and rather risky when you assess its standard deviation situation. Still, liquidity is robust with ARKF given an average daily trading volume of more than 500k shares over the past three months and a median bid/ask spread of just four basis points.

Digging into the portfolio, the 1-star, negative-rated ETF by Morningstar plots on the right side of the Style Box, indicating that it is a growth-focused allocation. Just 2% of ARKF is considered value. Moreover, with nearly three-quarters of the portfolio classified as growth, there is the risk that a re-rating lower in some of its highly-priced holdings could lead to quick losses. Long-term earnings growth has been stellar with ARKF’s holdings, so its current 35x price-to-earnings ratio is not particularly high so long as earnings growth persists.

Also, consider that the ETF’s net asset value per share was about double where it is today back in early 2022 – right before a historical Fed-hiking cycle. Today’s backdrop of falling policy rates globally is a boon for fintech and cryptocurrency-related stocks in my view.

ARKF: Portfolio & Factor Profiles

Cathie Wood typically likes to focus on a handful of up-and-coming fintech leaders no matter which ARK Invest fund we are inspecting. For ARKF, Coinbase (COIN), Block (SQ), and Shopify (SHOP) are the major holdings. Those three equities command a high 30% of ARKF’s total portfolio while the top 10 assets account for about two-thirds of the fund. Monitoring fundamental corporate earnings trends among the largest positions, as well as cryptocurrency happenings, is key.

ARKF: Tech & Crypto-Focused Portfolio

Seasonally, ARKF tends to rally modestly from early January through mid-February before encountering occasional bouts of volatility heading into the end of the first quarter, according to historical trends. The ETF’s 5-year performance history is strong, and annual gains have been focused in the second quarter with a bounce over the final two months of the year. Indeed, the fintech fund has followed the script well since last summer.

ARKF: Mixed Q1 Performance History

The Technical Take

ARKF stunned both the bulls and bears with a more than 60% surge from late October through the first portion of the vaunted Santa Claus Rally period. As we head into the new year, I see a few key technical price points investors should monitor. Notice in the chart below that the ETF has risen above a former resistance zone between $21 and $24. While technicians like to see more precise price points of support and resistance, rather than a broad range, so long as ARKF remains in the mid-$20s or higher, the bulls should remain in control. Still, with its long-term 200-day moving average about $7 below 2023’s closing price, the ETF could be somewhat stretched here at first blush. But take a look at the RSI momentum indicator at the top of the graph – it is currently working off overbought conditions, so a further consolidation in price should not come as a surprise.

While $24 is the first area of support, I see upside resistance that could come into play in the mid-$30s. Consider that ARKF failed to rally above that point on a pair of bounce attempts back in early 2022. Moreover, the upside-measured move price objective based on the rounded bottom formation over the last 18 months is also in the mid-$30s. Finally, there is simply not much volume of shares traded from the high $20s all the way up to the mid-$40s. This air pocket offers the bulls an opportunity to rally the fund further in 2024.

Overall, while ARKF remains overbought and stretched compared to its 200dma, I see more bullish potential than bearish risks technically.

ARKF: Bullish Breakout, Mid-$30s Target, Near-Term Overbought Conditions

The Bottom Line

I have a buy rating on ARKF based on its strong momentum and technical breakout. Following a protracted bear market that likely washed out weak hands, the ETF has upside potential to the mid-$30s as the crypto space continues to bounce.