Financial stocks are cracking under the strain of a banking crisis. So how has Cathie Wood found a way to gain 20% on financial stocks this year?
Simple: By investing outside of the mainstream financial sector. ARK Invest's ARK Fintech Innovation ETF is up big this year. It's the No. 2 best-performing actively traded sector ETF this year, trailing only Wood's ARK Next Generation Internet ETF, which is up 27.7%.
And ARK Fintech Innovation is outperforming even as the Financial Select Sector SPDR is down 8% and some bank stocks are in free fall. The failure of Silicon Valley Bank and Signature Bank is spooking investors who fear that problems lurk in the whole financial sector.
"ARKF is a fintech innovation ETF and has a large allocation to technology and crypto-related stocks, which have actually become more attractive given the recent pullback in yields," said Roxanna Islam of VettaFi. "It does not hold any traditional banking stocks, which have received the bulk of the negative sentiment."
How Wood Is Scoring Amid Financial Crisis
Ark Fintech Innovation's surprising rise this year isn't just about hitting a few lucky winners. More than 75% of the ETF's 27 holdings are higher.
Coinbase Global, a cryptocurrency marketplace, is by far the largest driver of ARK Fintech Innovation's outperformance this year.
The stock is the No. 1 position in the ETF, accounting for nearly 12% of the portfolio. And that outsize bet is paying off nicely this year. Shares just this year are up nearly 83%. That's also the top percentage gain of any stock in the ARK Fintech portfolio.
Coinbase shares are rallying, in part, due to this year's bounce in many of 2022's worst-performing stocks. Additionally, the company is aggressively cutting costs and looking for new revenue-generating subscription-based services and offerings for professional investors, says David Holt of CFRA in a report.
The ETF's next-best percentage gainer is Nvidia, a computer chipmaker not associated with financial stocks. It's up 66% this year. Why is Nvidia in Wood's financial ETF? The company's semiconductors commonly process cryptocurrency transactions.
Cryptocurrency exposure itself isn't likely to move Nvidia stock. The price of Bitcoin, for instance, is down more than 40% in the past 12 months. But it turns out the company's chip designs are also used in artificial intelligence. And that's the hottest tech trend going following the rise of ChatGPT.
What About Traditional Financial ETFs?
But while Wood's financial ETF is pulling ahead, what to make of the more traditional approaches toward the sector?
All eyes are on SPDR S&P Regional Banking ETF and iShares U.S. Regional Banks ETF, Islam says. They're down 24% and 26.7% respectively this year.
"Many are searching for an entry point among low prices," she said. "But there is still a lot of volatility within the sector especially as more news emerges," VettaFi's Islam said.
Right now, Islam says bank investors would do best to wait. Trying to call a bottom now is perilous as regulators' responses could either help, or hurt, bank ETFs.
"There could be value in regional banking ETFs at lower prices," she said. But "it is difficult to predict an entry point with ongoing volatility ... we could see prices go either way."
Top Stocks In Cathie Wood's ARK Fintech Innovation
| Company | Ticker | Weight in ETF | YTD ch. |
|---|---|---|---|
| Coinbase Global | 11.6% | 82.2% | |
| Nvidia | 1.3 | 65.8% | |
| DraftKings | 5.7 | 57.9% | |
| Roku | 3.4 | 53.2% | |
| Roblox | 1.6 | 50.1% | |
| MercadoLibre | 6.0 | 40.5% | |
| Global-e Online | 4.2 | 33.3% | |
| Twilio | 6.1 | 29.5% | |
| Zillow Group | 0.5 | 26.1% | |
| Shopify | 10.5 | 25.4% |
Sources: IBD, ARK Invest, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
