2024-01-17 06:40:47 ET
Summary
- Global portfolio managers prefer the Information Technology and Healthcare sectors for 2024, per a recent Goldman Sachs survey.
- ARK Innovation ETF is a tech-heavy active ETF that has been consolidating after a strong 2023, underperforming the S&P 500.
- ARKK has a high concentration in the top 10 holdings and low diversification across market sectors, posing a risk for investors.
- I outline key price levels to monitor as a tough seasonal stretch continues.
A recent survey conducted by Goldman Sachs asked global portfolio managers what their preferred sectors will be for 2024. The Information Technology and Healthcare sectors are seen as the place to be this year. Still, the Magnificent Seven stocks are forecast to underperform the S&P 493 if the survey's respondents are correct. It's a mixed bag, and perhaps the most well-known tech-heavy active ETF has been consolidating over the last several weeks after a strong 2023.
I have a hold rating on the ARK Innovation ETF ( ARKK ). I see its high valuation offset by robust growth trends, but neutral seasonality and a risky chart pose challenges.
Goldman Global PM Survey: Tech & Healthcare Favored
According to the issuer , ARKK is an actively managed ETF that seeks long-term growth of capital by investing under normal circumstances primarily (at least 65% of its assets) in domestic and foreign equity securities of companies that are relevant to the Fund's investment theme of disruptive innovation. ARK defines ''disruptive innovation'' as the introduction of a technologically enabled new product or service that potentially changes the way the world works.
ARKK is a large ETF with more than $8.1 billion in assets under management as of January 12, 2024. Share-price momentum has been weak to start the year, and I will note key resistance on the chart later in the article. The strategy carries with it a high 0.75% annual expense ratio and it does not pay a dividend . ARKK is also considered a risky fund given its high concentration and volatile share-price history. Still, liquidity of the ETF is very high with daily trading volume of more than 17 million shares on average over the last three months, and its 30-day median bid/ask spread is tight at just two basis points.
Digging into the portfolio, there's actually more small and mid-cap exposure than you might think. The 1-star, negative-rated portfolio by Morningstar has more than half its assets in mid-cap growth, making for a high-beta strategy. Less than one-fifth of ARKK is considered large-cap growth and there is very little value exposure. With a price-to-earnings ratio north of 37, it's certainly not a value play, but the allocation's long-term earnings growth history is strong. Given a high weight to fast-earnings growers, the lofty P/E does not bother me all that much. Identifying style trends is important when investing in ARKK.
ARKK: Portfolio & Factor Profiles
I mentioned at the onset that Tech and Healthcare are most favored by global portfolio managers, per Goldman Sachs. Those are the top two sectors in ARKK, combining for more than 55% of the ETF. There's a high 61% concentration in the top 10 holdings along with there being relatively low diversification across market sectors, so that is a key risk for investors.
ARKK: Sectors & Positions
Seasonally, ARKK tends to struggle early in the year, with bouts of volatility from January through early May before its tech-focused portfolio has historically taken off starting in the middle of the second quarter, according to data from Equity Clock .
ARKK: Neutral Seasonal Trends Into May
The Technical Take
ARKK plunged from the peak of market euphoria in late 2021 to a low at the turn of the year from late 2022 into 2023. Last year was strong for Cathie Wood's darling fund, but the uptrend, in my view, was not all that powerful. Notice in the chart below that shares meandered in a volatile range for much of 2023 before rallying big during the final two months of the fourth quarter. ARKK met resistance, however, in the mid-$50s - a level that had been problematic in the past for the fund. Still, with a rising long-term 200-day moving average, the trend broadly favors the bulls, and shares are just now touching the shorter-term 50-day moving average.
Given the $25 range that has emerged since May of 2022, a breakout above $55 would portend a possible move up to $80 based on the height of that range (added on top of the breakout point). Support is seen at the 200dma. Also take a look at the volume by price indicator on the left side of the graph - there is a high amount of shares traded all the way down to $34, so there should be ample cushion (buying demand) on a further pullback as ARKK works off technical overbought conditions.
Overall, the chart is neutral and there has been relative weakness against the S&P 500 to start 2024.
ARKK: Shares Pause as Resistance, Rising 200dma In Play
The Bottom Line
I have a hold rating on ARKK. Its relative strength has turned weaker as shares pull back from key resistance. I like the sector exposure and earnings growth trajectory, but that growth is offset by a high valuation.
For further details see:
ARKK: Tech And Healthcare Favored In 2024, Momentum Off To A Poor Start (Technical Analysis)