adventtr/E+ via Getty Images
adventtr/E+ via Getty Images
The iShares Exponential Technologies ETF (NASDAQ:XT) continues to be one of my go-to holdings for several reasons:
1. Market conditions are so wacky (technical term there) that I feel the need to have a representative position that grabs its fair share of a potential "moonshot" up move which could be either the blowoff phase of a dot-com like ending (as in 2000) or a name I'll keep adding to if I see more evidence of a 1995-1999 type of new long-term up leg. I may be a risk-management first investor, but that does not mean I don't take on potentially volatile positions in the broader portfolio. I just keep my weighting/exposure to such ETFs modest.
2. XT continues to show why the ARK Innovation ETF (ARKK) a much bigger and better known ETF with nearly 30 times as many followers on Seeking Alpha as XT, plays second fiddle to XT in my world. My only use of ARKK is occasionally buying puts, as its options market is fairly liquid (I do not hold such a position currently).
3. XT's 45% turnover rate tells me that even though its portfolio is reconstituted only annually, its process can drop weaker names before they become multi-year performance detractors. Unlike ARKK, XT is passively managed. I am an equal opportunity investor when it comes to the active/passive debate, though since my own process is active ("tactical" as I say), rotating among a set of indexes does allow for better knowledge about what I own. ARKK manager Cathie Wood has proven what many growth stock managers have over the decades: if you are willing to take on unlimited beta, you can dazzle folks with returns so high that they don't realize your performance has cratered.
In my last report on XT, lowered my enthusiasm to a Hold. That's worked out just fine, as it has appreciated but not as much as the S&P 500 Index. But with the potential for "liftoff," albeit with a good chance of that market move being sharp but brief, I am raising XT to a Buy.
As I always remind readers, I am not the biggest fan of "ratings" you will find, since my style is much more about how much I own of something that what I own. For instance, with an ETF like this, I could consider owning it long-term, but fluctuate between what I'd consider an average weighting, overweight or underweight position.
XT is a rare case of where owning more than 200 stocks is to my liking. I typically prefer highly-focused equity ETFs, since I view each one as a piece of a bigger portfolio puzzle. But with XT, I am able to dabble in some of the "FOMO" stocks that are solid companies, but which I would not touch on a valuation basis. XT's top 10 holdings make up less than 10% of assets.
As shown below, XT and ARKK could not look more different when it comes to the relative weights of their top holdings.
YCharts
And that is why this chart below looks the way it does. And also why I continue to "preach" in my articles and especially in the comments section, that investors need to apply much more scrutiny to their use of "past performance." Here, there were 2 very different paths to get to about the same place since the 2 funds' common inception date. I prefer XT's lower-volatility character. Lower, that is, compared to the roller coaster ride that is ARKK. XT's standard deviation the past 5 years is about 22% versus more than double that (46% for ARKK). That's the risk of the stock-picking approach of the latter, that historically runs hot and cold.
Other than the obvious risks of the type of stocks XT aims to own, the other hurdle is that technologies created to displace old ones might not in fact do so. In addition, the healthcare sector of XT might face a less-certain regulatory environment in an election year, and whatever the aftermath happens to be.
First, as a tactical investor, I am always ready to do an about-face in the name of preserving capital. But since I can't write about the same ETF every week, I limit my ratings changes to when I see a "window of opportunity" that I think is more than worth the risk I am taking on. Here's my technical view of XT. I've been charting for 44 years (since I was 16) and it is, to me, the biggest "truth" in investing, especially in modern markets which are influenced so much more by price than fundamentals, compared to past eras I've managed money through.
Barchart
I see XT having a good chance to attack its 2022 high around $68, and while I am not thrilled that the current move could drop to the bottom of that shaded "Bollinger Band" range around $50, I intend not to let it get that far if it starts to appear I'm off base here.
Still, this and any other analysis I do is never (to me, at least) about "am I in or out" because I treat investing as a process of modulation. That is, I was lightly positioned in XT, now that position is larger. My safety net in my approach to ETF rotation investing is to narrow down to a watchlist a set of ETFs I am willing to own because I feel I understand them, then mix them and weight them with the idea that those mixes and weights are very flexible, not set in stone.
XT is no ARKK. It is a peer to ARKK in my view, and a much less chaotic way to participate in the growth of stocks that fit the "innovation" theme. I go from hold to buy here.