TSM - A Deep Dive Into ARKQ Buying And Selling In Q2

2023-07-21 07:03:20 ET

Summary

• The ARK Autonomous Technology & Robotics ETF focuses on investments in tech and scientific research, including AI, automation, and robotics.
• During Q2, the fund's buying activity was based on price weakness and positive news, with significant reductions made in Tesla and Nvidia, despite remaining in the top 10 holdings.
• Among the most sizable moves, a couple of companies catch the eye and may warrant a deeper look.

The ARK Autonomous Technology & Robotics ETF (ARKQ) is an actively managed ETF with its core focus on pioneering autonomy and robotics. Its investment strategy aims at long-term capital appreciation, primarily by investing in securities that are intertwined with groundbreaking advancements in tech and scientific research. This encompasses a broad spectrum, including areas like energy, manufacturing, materials, AI, and automation-centric transportation.

The purpose of this analysis is to scrutinize the buy-sell activities within ARKQ, 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 30th of 2023, the ARKQ fund is constituted by the following holdings:

The fund's major allocations, roughly 63.85%, are centralized in the top 10 holdings, underscoring the fund's high concentration level.

Buying activity

Switching gears to scrutinize the last quarter's buying activity, it's clear the fund's overseers were far from idle. Certain acquisitions amounted to significant plays, with individual stock purchases accounting for more than 0.5% of the fund. In this respect, the most substantial buys were Taiwan Semiconductor Manufacturing Company (TSM), Teradyne (TER), and UiPath (PATH).

Analyzing the chart, it's discernible that the fund's purchase activities for UiPath and Teradyne seem to align with the local lows during the quarter - perhaps a move driven by spotting an opportunity in price weakness.

However, this isn't the case for TSMC, where the buy seems to stem from conviction following news about the US excluding South Korean and Taiwanese chip manufacturers from its China restrictions.

This implies the buying strategies are grounded on both price weakness and positive news, as evidenced by Teradyne and UiPath (price-driven) and TSMC (news-driven). Teradyne and UiPath rank among the top 10 holdings of this fund. I've previously penned some in-depth coverage on these two entities, which you can delve into for further insights here (UiPath) and here (Teradyne).

Selling Activity

On the selling front, the main reductions were made in Tesla (TSLA), Nvidia (NVDA), and Elbit Systems (ESLT). Among these, the substantial divestments were in Tesla and Nvidia, with ARK offloading close to 1.8% of the fund's value in each. These are major moves, yet they don't necessarily indicate a waning conviction. It appears more like a trimming strategy to capitalize on strong gains. By the end of June 2023, both companies remained prominent figures within the ARKQ's top 10 holdings.

The bulk of Tesla's selling activity took place in June, whereas for Nvidia, it was spread across May and June. Notably, these were periods of robust market performance for these stocks.

Main conclusions for ARKQ

After a close inspection of the fund's buying and selling activities in Q2, five companies appear in sharper relief: UiPath, TSMC, Teradyne, Nvidia, and Tesla. The latter two witnessed sales during their market strength. Despite the trimming, Tesla continues to hold the top position, and Nvidia remains among the top 10. My inference is that due to Nvidia's price surge, the conviction level may have slightly tapered - a sentiment echoed by Cathie Wood. The scale of selling hints that the fund is likely shifting its focus towards other investment opportunities, thus heightening the importance of its buying activities. Hence, our attention gravitates towards Teradyne, TSMC, and UiPath. In my view, these companies merit further exploration.

Broadening our lens, ARKQ might seem expensive compared to its counterparts, especially when management fees come into play.

Yet, remember that it's a multi-billion dollar fund that has had its moments of stellar performance and seems to be inching close to leading the pack again. Essentially, investors are paying a premium for the potential outperformance brought by active management, which might or might not materialize.

Stacked against the S&P, the fund outshone for a period, although it's currently trailing slightly, especially after a rough 2022.

As we wrap up, it's worth weighing the risks tied to this ETF. The fund's portfolio comprises several early-stage, loss-making companies that carry hefty price multiples. This is somewhat akin to gardening - you plant various seeds, some flourish, others fail to sprout. These firms typically burn cash at a high rate and might need to issue more shares soon. This presents two intertwined risks: dilution, which can lower the value of existing shares, and liquidity, which could affect the company's ability to cover short-term liabilities if it fails to raise necessary capital. These factors should be on every investor's radar when mulling over this fund.

However, the firms we've discussed, which form a substantial chunk of the fund, are now well-entrenched in their respective markets, positioning them to become cash-generating engines within innovative sectors. Moreover, the role of active management in this context is to ensure that investors have a well-diversified portfolio of these high-risk, high-reward stocks. The idea is to structure the investment such that the growth and profits from the companies that flourish will adequately offset any losses from the ones that fail to make the cut. This balanced approach is what investors pay a premium for when they opt for actively managed funds like ARKQ.

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