META - A Deep Dive Into ARKK Buying And Selling In Q2

2023-08-15 13:05:03 ET

Summary

• The ARK Innovation ETF focuses on disruptive innovation and aims for long-term capital appreciation through investments in technologically enabled products and services.
• The fund's buying and selling activities represented 8% of the fund.
• The fund's trading strategy showed some interesting moves like the reappraisal of Palantir.

The ARK Innovation ETF ( ARKK ) is an actively managed ETF with its core focus on disruptive innovation. Its investment strategy aims at long-term capital appreciation primarily by investing in securities that derive a significant portion of their revenue or market value from the introduction of a technologically enabled new product or service that potentially has disruptive effects in the way the world works. This encompasses a broad spectrum, including areas like DNA technologies and the “Genomic Revolution,” automation, robotics, and energy storage, artificial intelligence and fintech innovation

The purpose of this analysis is to scrutinize the buy-sell activities within ARKK, 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 here.

Holdings

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

The fund's major allocations, roughly 62.84%, are centralized in the top 10 holdings, underscoring the fund's high concentration level.

Buying activity

Delving into the nuances of last quarter's trading strategy, it’s apparent that there was an unwavering engagement from those directing the fund's actions. Representing nearly 8% of the fund, we observed the acquisition of assets across a broad spectrum, encapsulating positions in 23 distinct firms. Particularly commanding attention were allocations exceeding 0.5% of the fund during this period, which encompassed names like Tesla ( TSLA ), Palantir ( PLTR ), UiPath ( PATH ), Twilio ( TWLO ), Block ( SQ ), Coinbase ( COIN ), Meta ( META ), and Teradyne ( TER ).

Let's unpack this a bit further.

When looking at Tesla and Palantir, the fund took its position in Tesla during an ebb in its market trajectory early in the quarter. Palantir's acquisition, in contrast, was timed post its earnings release on May 8th, hinting that the results might have served as a catalyst in recalibrating the fund's perspective towards it.

Twilio's acquisition was bifurcated between its softer period in May and a subsequent surge in June. UiPath's inclusion predominantly took place around May 25th, a phase post a steep two-day market drawdown. Block, however, presents a more enigmatic pattern, making it somewhat elusive to discern the underlying strategy.

Rounding up our examination, we turn to Teradyne, Meta, and Coinbase. Teradyne, akin to Block, exhibits an opaque trading pattern. In the case of Meta, while it had already made significant market moves during the quarter, purchases post Nvidia's stellar earnings suggest a possible reassessment of Meta's prospective role in the AI chipset ecosystem, potentially lagging but not necessarily out of the race. Coinbase's positions were distinctly carved during its less buoyant periods throughout the quarter.

What emerges from this intricate tapestry of trading is the fund's inclination towards counter-cyclical investments, capitalizing on market troughs. Additionally, events, particularly earnings announcements, seemed to play a pivotal role in triggering a revaluation and subsequent action.

Selling Activity

Diving deeper into the fund's Q2 divestiture moves, there's a notable drawdown in positions such as Exact Sciences (EXAS), Shopify (SHOP), and Tesla ((TSLA)). These reductions accounted for more than 1% of the fund. Shopify’s divestiture was notably timed before its share price rally. Contrastingly, Tesla was predominantly offloaded during its bullish run in June. Exact Sciences' selloff was distributed across the quarter, though a significant chunk was during May’s stock price surge.

Main conclusions for ARKK

Upon close scrutiny of Q2’s strategy, the fund's sizable offloads in Exact, Tesla, and Shopify emerge. But is this an indication of the fund distancing itself from these equities? A deeper dive reveals otherwise. Each maintains a position within the top 10 holdings. The strategy around Tesla seems almost rhythmic - buying during its April dip and selling amidst its June strength. On the acquisition end, eight stocks come under the spotlight. The fund’s modus operandi, primarily angled towards buying during downturns, does present outliers. Palantir's purchase post-earnings indicates a recalibration of its perceived value by the management (I previously wrote about Palantir here ). Meta's acquisition after Nvidia's robust earnings suggests an optimistic stance on Meta's AI prospects in my view, potentially even perceiving it as a more attractive valuation proposition than Nvidia. Twilio and Block (I previously wrote about Block here ), however, paint a less lucid picture.

Expanding the lens on ARKK, its expense ratios seem justifiable against its contemporaries, considering management fees. Historically, its stellar period of outperformance might have justified these costs in the eyes of investors. Yet, the recent two-year trajectory, marked by its sub-par performance, raises eyebrows. Investors are essentially staking their capital on the potential alpha of active management, a proposition that remains ambiguous in its delivery.

In summation, navigating ARKK requires an astute risk evaluation. Its portfolio, rich in nascent, unprofitable ventures with significant valuation multiples, conjures the image of a venture capitalist managing the risk of high mortality rates. Such ventures, often facing cash outflows, might resort to share issuances, ushering in the dual challenges of dilution and liquidity. Yet, the core of the fund, deeply embedded in burgeoning sectors, holds the promise of evolving into profit-churning giants. The role of active management is akin to a maestro, orchestrating a symphony where the crescendos of thriving investments drown out the notes of the underperformers. For this delicate dance of equilibrium, investors are being charged a premium. However, in the current macro backdrop of escalating interest rates, and considering the nature of the fund's major holdings, I’d exercise caution before bolstering an already heavy position in one’s portfolio.

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