Happy Thursday! In mythology, Janus is a god of transitions who is often depicted as a two-faced deity. A mere three sessions into the month of January, and some investors already may be feeling whiplash from a month that started out solidly enough, despite the buoyancy of Treasury yields, only to abruptly be reminded that the accommodative monetary-policy regime enjoyed for the past several years might give way soon to a less-easy period. And large-capitalization growth stocks, which have reigned supreme during the pandemic, finally may give substantial ground to value plays.
But with less than a week into 2022, let’s not get ahead of ourselves. Three sessions…even a whole month…doesn’t make a trend, as we enter the sophomoric phase of the coronavirus pandemic.
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Top 5 gainers of the past week
VanEck Oil Services ETF OIH, +1.35%
NorthShore Global Uranium Mining URNM, +3.59%
Alerian MLP ETF AMLP, +1.27%
Global X MLP ETF MLPA, +1.19%
SPDR S&P Oil & Gas Exploration & Production ETF XOP, +0.08%
Source: FactSet, through Wednesday, Jan. 5, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater
…and the bad
Top 5 decliners of the past week
Global X Fintech ETF FINX, -0.83%
Global X Cybersecurity ETF BUG, -0.30%
Global X Cloud Computing ETF CLOU, -0.90%
WisdomTree Cloud Computing Fund WCLD, -0.75%
First Trust Nasdaq Cybersecurity ETF CIBR, -0.48%
Traders of the lost ARK
This probably isn’t the start to a year that Cathie Wood’s was looking for in her suite of ETFs. The flagship Ark Innovation ARKK, -1.36% was down nearly 8% for the week, at last check Thursday.
It isn’t surprising though, right? The basket of unprofitable tech and innovation-themed investments that make up her ETFs are withering in an environment that looks destined for higher rates that impact future borrowing costs, which investors should rightly discount. Wood did not immediately respond to a request for comment.
It isn’t just Wood, it’s the entire complex of information technology where assets need to be repriced for richer interest rates. If the Federal Reserve’s December meeting minutes are any indication, we likely will see a range of tightening schemes, including the reduction of the U.S. central bank’s nearly $9 trillion balance sheet, interest-rate increases, with at least three hikes in 2022, in addition to the wind down of asset purchases.
In some ways, this isn’t tightening as much as it is normalizing policy that has included holding policy rates at a range between 0% and 0.25% for nearly two years, a regime the Fed soon plans to adjust to tackle COVID-fueled inflation spike.
ARK Invest is in the eye of the storm. Wood has advised investors to maintain a long-term mind-set, as far out as five years.
Are there other options to ARK funds? Sure. That said, ARK investments surged an average of 150% in 2020 and alternatives might not perform so parabolically, even if they are less stomach-churning on the downside.
“ARK investors are being reminded that what is inside the fund and not just a strong prior record will be the driver of ETF returns in 2022, Todd Rosenbluth, head of ETF and mutual fund research at CFRA told MarketWatch.
“Higher risk companies tend to be shunned in a rising rate environment where investors prefer more profitable companies,” the researcher said.
The CFRA analyst recommends a few names that might interest investors eager to identify “quality” picks.
Fidelity Quality Factor ETF FQAL, -0.79% is down 2.6% in the first four trading days of 2022 but has risen nearly 28% over the past 12-month period. FQAL, referring to the fund’s ticker, trades on the NYSE Arca platform and carries an expense ratio of 0.24%, which translates to a $2.40 annual expense for every $1,000 invested. The ETF tracks an index of large and mid- cap U.S. companies “with an emphasis upon balance sheet measures,” such as cash flow margin, return on invested capital and investments are market-cap weighted.
Invesco Quality Factor ETF SPHQ, -0.15% is off 2.3% in the week to date but has registered a 26% return over the past year. SPHQ charges 0.15% and focuses on return on equity, and consistent earnings and strength of earnings, with no single sector of the market representing more than 40% of the fund. It has been around since 2005.
ETF.com compares that fund with First Trust Capital Strength ETF FTCS, -0.69%, which has a similar profile, with a focus on balance sheet strength. The ETF, which was launched in 2006, carries a fee of 0.56% and rose 22.5% in the 12-month period but is off 2.2% for the week.
Finally, iShares MSCI USA Quality Factor ETF QUAL, -0.94% has an expense ratio of 0.15% and is off 2.5% for week but up 23% over the past year. It is largest among the quality ETFs mentioned, with assets over $25 billion.
The BOAT that floats?
Let’s give a shout to the SonicShares Global Shipping ETF BOAT, +0.76%, which aims to give investors exposure to supply-chain issues that have popped up during the pandemic.
BOAT kicked off in August and is a passively managed ETF focused on water transportation. It is tiny at around $14 million in assets but is up 2.2% on the year and 12% over the past three months. Its expense ratio is 0.69%.
Paul Somma, founder of SonicShares ETFs, thinks that shipping issues won’t be resolved soon, a benefit for the global shipping companies that make up BOAT.
Visual of the week
Hunting for yield? Choose wisely says CFRA. Here are some of the varying performances from dividend-oriented ETFs of 2021.
Popular ETF reads
Cathie Wood’s ARK ETFs Are in a Deep Hole—Already (Barron’s.com)
Bond Rout Ignites More Than $1 Billion Exodus From Treasury ETF (Bloomberg News)
SEC delays decision on NYDIG Bitcoin ETF (Reuters)
ARKK Vs. VGT: Which ETF Is The Better Pick For Long-Term Investors? (Seeking Alpha)
Schwab follows rivals with fee cuts on $13bn in bond ETFs (Financial Times)
As the ETF world booms, so do the risks (FT.com)
—That’s a Wrap