ARWK: A Crypto Beneficiary In ’23, Bullish Momentum ’24 (NYSEARCA:ARKW)

2023 was a remarkable year for anything related to tech and crypto. Funds heavily invested in those niches enjoyed big gains, but also some volatility along the way. Still, it was Bitcoin and the Information Technology sector that sported the best total return and risk-adjusted returns, according to Goldman Sachs. All told, the most important cryptocurrency rose $17k to about $42k by late December while the I.T. slice of the S&P 500 was the leading sector, up more than 50%. Those two areas are key for one internet fund.

I reiterate my buy rating on the ARK Next Generation Internet ETF (NYSEARCA:ARKW). While it features a high valuation, I assert this ETF is a solid play for momentum investors in 2023.

Top of the Pack in 2023: Bitcoin & Tech

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. The issuer 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 has grown in size since I first reviewed the ETF in the middle of 2023. Total assets under management now sum to about $1.8 billion, though the growth-focused fund does not pay a dividend. ARKW is also on the expensive side, given its high annual expense ratio of 0.87%. Still, share-price momentum is very strong following a remarkable rally off a low notched in late October along with the broad equity market. I will detail important price levels to watch later in the article. Liquidity is mixed with ARKW – average daily trading volume is more than 250k shares and its 30-day median bid/ask spread is eight basis points, so using limit order during slow periods in the trading day is prudent to avoid bad fills.

Digging into the portfolio, the 1-star, neutral-rated fund by Morningstar plots on the far-right side of the style box, indicating a high weight in growth equities. Just 4% of the allocation is considered value. What’s more, more than three-quarters of ARKW is small or mid-cap in size, adding to potential risk. Value investors will likely shun the ETF, given its high 37x price-to-earnings multiple and a price-to-sales metric of almost 4. But with long-term EPS growth of more than 16%, there are earnings to back up the lofty price.

ARKW: Portfolio & Factor Profiles

Prospective investors must acknowledge that ARKW is quite concentrated. It’s largely a tech and even partly a fintech fund. More than two-thirds of the portfolio is in the I.T. or Communication Services sector. Of the 11 market sectors, the fund holds stocks in just six of those areas. Moreover, the top 10 positions comprise a high 63% of the portfolio, so monitoring fundamental and technical conditions with Coinbase (COIN), Block (SQ), and Roku (ROKU) is important.

ARKW: Holdings & Sector Breakdowns

Seasonally, ARKW tends to start the year strong, rallying more than 5% through mid-February before volatility sometimes strikes over the back half of the first quarter, according to data from Equity Clock. Still, the fund has a very strong track record, though a severe drawdown of more than 80% left many investors with major losses during the 2021-2022 bear market.

ARKW: Bullish Early-Year Trend, Late Q1 Volatility

The Technical Take

Back in July, I highlighted a key bullish reversal signature taking place in ARKW. Indeed, the ETF generally rallied over the second half of 2023, but a material pullback to support in the high $40s took place, offering a favorable entry point. Notice in the chart below that the upper $60s was key resistance. That spot was the demarcation line for a long-term bearish to bullish reversal pattern. The fund finally broke out just a few weeks ago, and I see a bullish upside measured move price objective to $100 based on the height of the bullish rounded bottom reversal pattern that hit a low of $36 at the turn of 2022 to 2023. Add the $32 height on top of the $68 breakout point, and you get the $100 target.

Also take a look at the long-term 200-day moving average – it is positively sloped, indicating that the bulls are in command. I also like that shares are working off technical overbought conditions, evidenced by the RSI momentum oscillator at the top of the graph.

For now, long with a stop under about $65 appears as a favorable risk-reward play, targeting the high $90s.

ARKW: Bullish Upside Breakout, Target to $100, $68 Support

The Bottom Line

I reiterate my buy rating on ARKW. I see high momentum in the fund. Currently, ranked no. 4 out of 83 in its Seeking Alpha Sub Class, the ETF is one to watch for further gains in 2024.