ARKK - NOPE: A Market Pro's Best Ideas In A Nice Neat ETF Package

Summary

• Noble Absolute Return ETF is a rare bird in the exchange-traded fund business, just like its outspoken, veteran manager, George Noble.
• This new NOPE ETF provides a place where investors can piggyback on the best ideas of a manager who has 30 years of top institutional research contacts.
• NOPE's volatility out of the gate is a signal to investors that this ETF is a role player in a portfolio. For the patient, it can be a good one.
• NOPE's best feature is its flexibility. It employs a "go-anywhere" style. In an endless bull market, that is helpful. In a market like this, it can be a portfolio game-changer.
• NOPE is still getting ramped up, but it is one of those "right ETFs" for the times we live in. I rate it a Buy. Just don't expect T-Bill style volatility.

By Rob Isbitts.

Strategy

Noble Absolute Return ETF ( NOPE ) is an active exchange-traded fund ("ETF"). That is, it is not an index-tracking fund. As its name implies, pursues an "absolute return" objective. That means it does not try to beat a specific benchmark. Over the long-term, it aims to produce positive returns. And, it attempts to do that by all means necessary.

At its core, the ETF is a set of long and short stock positions. But it will not hesitate to use options, leverage, and just about any other directional or hedging technique to pursue profits and reduce the probability of experienced sustained losses. This ETF is a long-short hedge fund in an ETF wrapper.

Proprietary ETF Grades

• Offense/Defense: Offense

• Segment: Tactical

• Sub-Segment: Long-Short

• Risk (vs. S&P 500): Similar.

Proprietary Technical Ratings

• Short-Term (next 3 months): N/A (new ETF, limited price data)

• Long-Term (next 12 months): (new ETF, limited price data).

Holding Analysis

It would be a critical error in judgement to look at NOPE's holdings on any given day, and draw long-term conclusions about how this ETF will be invested at any point in time. As of this writing, the portfolio has as about 10 small long positions, mostly in the energy and mining sectors. That long exposure is dwarfed by a combination of short positions, some very small, but a number of very large ones. Noble has been an outspoken bear on Tesla, Inc. ( TSLA ), and NOPE clearly reflects that. TSLA is a 22% short position as of this writing.

Whereas the investor population is more used to static, rules-based strategies, truly tactical investors take a different approach. The question is never "what should I buy to fit the same mold all the time." There are many ETFs that do a great job of that.

But what the market has lacked over the years are ETFs that flaunt convention, decide not to be the 117th large cap value ETF listed on the stock exchange, and instead fill an unfilled niche. This ETF tries to do that by looking anywhere and everywhere in the public markets. Here is one snapshot from the fund's website, to provide an idea of what that looks like.

Strengths

We have many thousands of pictures to choose from when we publish articles on Seeking Alpha. The predictable thing would be to find one with the word "nope" or "yes." But I'm not exactly the predictable type of investor. And neither is George Noble, who created and captains this ETF. The 2 greatest strengths of NOPE are its zero tolerance policy for foolish investment analysis, especially when it comes to investments that Noble believes have been over-hyped. A Barron's Roundtable member and past hedge fund manager in addition to his successful tenure at Fidelity, Noble has re-emerged on the investment scene over the past year. His no-nonsense style and top-quality industry research connections have created perhaps the most popular Twitter Spaces sessions around.

This tremendous increase is Noble's public profile has allowed him to explain his broad concerns about the current market environment, while enhancing an already deep network of research connections, and broadening his base of followers (over 50,000 on Twitter - full disclosure, I am an occasional participant and speaker in those Spaces).

Weaknesses

NOPE is not a very big ETF, at least not yet. This is not a surprise since it has only existed since late September, 2022. During that time, it has amassed a very respectable $45mm in assets, and trades about $3mm in volume on an average day. This type of niche ETF is more a tortoise than a hare when it comes to asset-raising. But the tortoise did beat the hare, as I recall.

NOPE's early days have brought a lot of short-term volatility. Depending on how Noble manages the ETF going forward, it could be a frequent roller coaster ride, or behave closer to a market neutral fund, whereby the price movement of the longs and shorts are not as large as what has occurred so far. That could be a reflection of the part of the bear market cycle we are currently in. This is where the prices of those bubble stocks continue to trend downward, but are interrupted by several "bear market rallies" that keep the hopes of "long" investors alive. 2023 should give us a lot of answers in that regard.

Opportunities

As the ETF's website states, NOPE is an ETF " built on the philosophy of saying NOPE to passive investing, NOPE to ignoring valuations, and NOPE to asset bubbles." If there were ever a right time and place for this ETF to arrive on the scene, it is now. That does not assure success. but it does provide an outlet for those who agree with Noble that as well as Cathie Wood's ARK Innovation ETF ( ARKK ), as well as many of the icons of the Covid pandemic recovery rally.

For investors who believe that TSLA is destined to fall much more than it has, and that so-called "innovation" stocks are still grossly overvalued, NOPE is a solid way to express that view. And, as the ETF can range from 150% long to 100% short, if the markets get even more "whippy" than we saw during much of 2022, NOPE and other tactical, go-anywhere, long-short style ETFs allow investors to offload the day-to-day long-short management.

Threats

NOPE is today, more than anything, focused on the belief (which I firmly agree with) that too many years of loose monetary policy has spawned outlandish valuations in certain "popular" securities that will, in time, correct themselves. The biggest threat is that this doesn't happen any time soon. Bull markets die hard, not at once, and it is process. But as that process plays out, investors in NOPE should expect periods of significant volatility in both directions, as they have already seen in this ETF's first 4 months of life.

Conclusions

ETF Quality Opinion

There was a time when the so-called "network effect" was less critical for generating investment ideas to drive performance. But that has done a 180-degree turn in recent years, as financial pros and aspiring self-directed investors are meeting virtually and collaborating like never before. Noble has been one of the driving forces of that over the past year, and I have to assume that it will help him accumulate, evaluate and filter ideas for his fairly new ETF. NOPE is not an experiment. It is, however a unique ETF that, if used properly in the context of an overall portfolio, can be a potentially powerful tool to both protect capital and enhance returns. It grabs a spot on my "undiscovered ETF" watchlist.

But let's be clear: NOPE is not for everyone. As George Noble himself laments regularly, investors who don't "do the work" to understand what they own are destined to fail. That not only applies to one's own stock selection and rotation, but also to any decision to buy or sell an ETF. That is especially the case with ETFs like NOPE, whose strategy is anything but "traditional."

ETF Investment Opinion

There has probably never been a better time for investors to familiarize themselves with the small but increasing group of go-anywhere, hedge fund-like ETFs such as NOPE. We do not know how long it will take before one can simply invest in an equity sector, industry or theme, and confidently expect to generate multi-year, buy and hold profits. So especially at times like this, ETFs like NOPE can be potential game-changers for investors willing to understand what it is and isn't, and plug it in according to their own portfolio objectives. As for me, I'm saying "yup" to NOPE. It gets a Buy rating, with a 12-24 month time frame in mind.

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