ARKW: Tesla’s Wide Ride A Tailwind, Eyeing Higher Prices In 2H (NYSEARCA:ARKW)

The ARK Next Generation Internet ETF (NYSEARCA:ARKW) got off to a hot start in 2024. Shares rallied from a low near $67 in early January to $85, a 23-month high, by late March. Over the past three-plus months, however, the tech-focused fund has meandered. There has been a boost since late last month as shares of Tesla (TSLA) soared about 50% from June 25 through its intraday peak of $271 following the release of the June US CPI report.

TSLA is the largest holding in ARKW, now more than an 11% position, and relative strength in the EV automaker’s stock bodes well for ARKW. Much also depends on strength in crypto-related and other high-growth, low-market cap equities.

I reiterate a buy rating on ARKW. While there has been mixed performance since I analyzed the fund on the final day of 2023, the ETF has returned 7%. Its current valuation remains lofty, but the technical situation still looks attractive.

TSLA’s Rally A Boon To ARKW, Bitcoin’s Weakness Hurting

According to the issuer, ARKW is an actively managed ETF that seeks long-term growth of capital by investing under normal circumstances primarily (at least 80% of its assets) in domestic and U.S. exchange-traded foreign equity securities of companies that are relevant to the fund’s investment theme of next-generation internet. ARK Invest believes companies within this ETF are focused on shifting technology infrastructure to the cloud, enabling mobile, internet-based products and services, new payment methods, big data, artificial intelligence, the Internet of Things, and social media.

ARKW’s growth trajectory that I mentioned last time has waned. Total assets under management have shrunk to just $1.46 billion as of July 11, 2024. With a high 0.87% annual expense ratio, the fund is not the cheapest one you’ll come across. Moreover, there is no stated yield, which keeps away income-focused investors.

But with a solid share price momentum grade and high liquidity, there are some favorable quantitative characteristics. ARKW remains a highly risky allocation, though, as evidenced by both its high historical volatility levels and concentrated portfolio.

I assert that with a potential consolidation in the AI trade, we could see a rotation into stocks less related to semiconductors. If that were to play out, then expect software companies and shares of tech stocks lower on the quality and market-cap spectrums to perform better.

As it stands, ARKW’s portfolio is heavily allocated to the growth side of the style box. The 1-star, neutral-rated fund by Morningstar features a high 38.0 price-to-earnings ratio and a long-term earnings growth rate of 15.8%, leading to a somewhat high 2.4 PEG ratio. The fund is really a wager on growth in SMID-sized tech stocks, bitcoin, and cryptocurrency-related equities.

ARKW: Portfolio & Factor Profiles

Looking closer at the portfolio, ARKW features high exposure to the Information Technology sector, with a larger relative weight versus the S&P 500 to the Communication Services sector.

There aren’t any value or defensive positions – even the Financials sector holdings are in the fintech space. Prospective investors should also recognize that there’s a material 10% weight in the ARK 21Shares Bitcoin ETF (ARKB).

ARKW: Holdings & Dividend Information

Seasonally, we are entering a somewhat bearish calendar stretch, which is a concern. There may be volatility in the ETF’s offing, and I will highlight a key support level that could be tested if historical trends play out.

Seasonal Trends Turn Weaker In August

The Technical Take

ARKW is a fund for a specific investor type. Those seeking a high-risk, high-reward portfolio focused in a niche with significant growth potential fundamentally may appreciate the fund. Technically, the trend is clearly higher. Notice in the chart below that shares have been making a series of higher highs and higher lows after hitting a bear-market bottom of $36 in late 2022. Today, with a rising long-term 200-day moving average and improved RSI momentum readings compared with much of those seen in the second quarter, I still see higher prices ahead.

Support is found in the $67 to $72 range – that’s where the ETF paused about a year ago before the broader market corrected. Furthermore, following a breakout in Q4 2023, the bulls defended that spot. While there’s the risk of an emerging head and shoulders topping pattern, with the latest RSI momentum thrust, I expect ARKW to break to new multi-year highs in the second half of the year. For now, resistance is the YTD peak of $85, but we could see the fund test a rising uptrend resistance line, currently near $93.

Overall, ARKW’s trend is broadly higher with solid momentum trends despite relative weakness to the S&P 500 and Nasdaq Composite in 2024.

ARKW: Bullish Long-Term Uptrend Intact, Better RSI, $68 Key Support

The Bottom Line

I have a buy rating on ARKW. Though the valuation is high, investors should expect that, given its risky allocation to tech-related industries. The technical trend is positive ahead of what has been a weak seasonal stretch historically.