TWLO - A Deep Dive Into ARKF Buying And Selling In Q2

2023-08-09 10:45:57 ET

Summary

• The ARK Fintech Innovation ETF focuses on investing in securities related to fintech innovation, including transaction innovations, blockchain technology, and customer-facing platforms.
• The fund's buying activity in the previous quarter was aligned with local lows in stock prices, indicating an opportunistic stance during market declines.
• The fund divested from Shopify, Nvidia, and MercadoLibre, possibly to optimize gains rather than a lack of belief in the companies.

The ARK Fintech Innovation ETF ( ARKF ) is an actively managed ETF with its core focus on pioneering financial technology. Its investment strategy aims at long-term capital appreciation primarily by investing in securities that derives a significant portion of its revenue or market value from the theme of Fintech innovation. This encompasses a broad spectrum, including areas like transaction innovations, blockchain technology, risk transformation, frictionless funding platforms, customer facing platforms.

The purpose of this analysis is to scrutinize the buy-sell activities within ARKF, honing in on key trends among individual holdings which might hold substantial implications for the ETF. The objective here is to delve into the thought patterns driving the fund's management team. Remember, before committing to any investment decisions, thorough examination of ARK funds' detailed information is crucial. Additional information can be found via the following link: https://ark-funds.com/

Holdings

At June 30 ^th of 2023, the ARKF fund is constituted by the following holdings:

The fund's major allocations, roughly 65.90%, are centralized in the top 10 holdings, underscoring the fund's high concentration level.

Buying activity

Turning our attention to the previous quarter's trading activities within the fund, there's a distinct evidence that those at the helm were anything but complacent. The buying activity represented close to 5% of the fund. Notable inclusions were UiPath ( PATH ), Block ( SQ ), Twilio ( TWLO ), and Coinbase ( COIN ).

A scrutiny of the data reveals the fund's buying is aligned with local lows in the stock price for Coinbase, Block, Twilio, and UiPath during the quarter - an inclination suggesting an opportunistic stance in response to price vulnerability.

This appears to be a consistent theme in the fund's tactical management, with the adoption of a contrarian approach to purchase during market declines. Moreover, these four highlighted stocks are among the top 6 holdings, marking them as significant maneuvers that warrant further examination. In-depth analysis of some of these companies is available [ here (UiPath), here (Coinbase), and here (Block)].

Selling Activity

On the divestiture side, primary cutbacks were made in Shopify ( SHOP ), Nvidia ( NVDA ), and MercadoLibre ( MELI ). Nvidia was sold during the AI strength period, and its exclusion from the top 10 holdings insinuates a waning confidence, though it's pertinent to note that Nvidia's fintech involvement is indirect at best. Shopify's sale occurred during its peak quarter, but it maintains its fund prominence, indicating mere trimming of the holding. Meli, however, was shed without noteworthy price action, yet stayed a top 10 holding. These actions denote significant strategies, more akin to optimizing gains rather than a reduction in belief. MercadoLibre's sale, however, lacks an evident explanation.

Main conclusions for ARKF

A close assessment of the fund's Q2 activities unveils seven salient stocks: UiPath, Twilio, Coinbase, Block, Nvidia, MercadoLibre, and Shopify. The former four were acquired on downtrends, while the latter trio was divested during strength (Meli not exactly). Despite reductions, Shopify's pre-eminence persists, while Meli lingers in the top 10. Nvidia's rich valuation possibly attenuated conviction, and the selling magnitude hints at a shift in focus, emphasizing the buying actions. Consequently, UiPath, Twilio, Block, and Coinbase emerge as worthy of deeper investigation.

Broadening the scope, ARKF's expense profile does not appear egregious relative to peers, particularly when considering management fees

It's critical to recognize this billion-dollar fund's solid year-to-date performance, inching towards a potential inflection point. Investors are indeed paying for possible outperformance through active management, a promise with uncertain fulfillment.

Contrasted with the S&P, the fund's past brilliance is now shadowed by a challenging 2022.

In conclusion, it's prudent to assess the inherent risks with this ETF. Its portfolio is rich with early-stage, loss-making companies trading at significant multiples. This investment landscape resembles gardening - some seeds flourish, others wither. These companies, often cash-burning, may necessitate share issuance, presenting dual risks of dilution and liquidity. Yet, the fund's substantial holdings, now firmly positioned within innovative sectors, seem poised to transition into cash-generating entities. Active management's role here is to balance this high-risk, high-reward portfolio, ensuring that growth from thriving companies offsets losses from those that falter. It is for this equilibrium that investors are paying a premium in actively managed funds like ARKF.

All-in-all, the macro environment we are in is giving me pause. Rising interest rates are a headwind for many assets, and given the profile of the top holdings in the fund, I don't think it's time to increase exposure right now. These companies have already rich valuations that might get crushed on a whim. I'm going to take a step back and wait for the dust to settle before making any big moves.

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