Tech stocks, and consequently tech funds, typically suffer most from economic tightening and rising rates. Rate hikes make debt costlier, and most tech firms (especially smaller ones) rely heavily on leverage to fund operations and growth in lieu of actual earnings. At the same time, investors prefer less risk overall. If you can generate, say, a guaranteed 5% return from short-term Treasuries, you’re less likely to roll the dice on a random startup. Low rates meant tech soared in the past few years, but those days are waning – though they will hopefully return one day.
Tech ETFs offer exposure to a broad range of risky tech stocks, with the inclusion of expense ratios that eat into your gains. Some solid tech funds remain, but, unfortunately, these three don’t pass muster – dump them before the damage is done.
Global X Blockchain ETF (BKCH)
Expense ratio: 0.50%, or $50 annually on a $10,000 investment
Global X Blockchain ETF (NASDAQ:BKCH) is having a surprisingly strong year, all things considered, and its per-share price has climbed 83% since January. That’s a strong performance. It’s particularly noteworthy as the general crypto sphere suffers from the interest rate risks as the high-flying tech sphere. Legacy and traditional institutions are increasingly noting blockchain tech’s potential. Likewise, the concept itself is rapidly transitioning into less of a meme, and more of a potential long-term staple of banking, privacy, and cybersecurity.
And that’s why investors should dump this ETF.
Crypto mining itself is becoming an increasingly costly proposition, both financially and socially, as sustainability concerns rock major miners like Riot Platforms (NASDAQ:RIOT), which comprises 9.32% of BKCH. These smaller firms, focused solely on mining and blockchain periphery, will likely get squeezed out quickly as larger institutions like BlackRock (NYSE:BLK) begin their own forays into crypto. While there isn’t yet a ton of inertia institutionally, the starting whistles sound as legacy behemoths begin cycling into the space. These large firms have the cash to attract the best talent, the infrastructure to build out their holdings, and the political clout to influence regulatory action. These are three critical aspects stunting BKCH’s holdings, and the ETF will likely suffer as major competition begins stepping up.
SPDR S&P Internet ETF (XWEB)
Expense ratio: 0.35%, or $35 annually on a $10,000 investment
SPDR S&P Internet ETF (NYSEARCA:XWEB) holds a strange mix of major tech stocks like Meta (NASDAQ:META) alongside objective losers like Tripadvisor (NASDAQ:TRIP). In fact, Tripadvisor is the fund’s largest holding by weight, highlighting a key downfall to the ETF: per Morningstar, XWEB overemphasizes liquidity to the detriment of stock quality.
Liquidity is another word for total trade volume. Fund managers can easily and quickly rebalance, tweak, and adjust the holdings by emphasizing liquidity. Liquidity is critical for other reasons, but focusing on tradability over stock strength isn’t a winning strategy. Specifically, most of XWEB’s holdings are highly leveraged with limited profitability. The economic belt-tightening that’s only just begun will weigh heavily on firms whose capital structure demands heavy debt. Likewise, profitability and value are increasingly important as investors can generate solid yield from riskless fixed-income securities like Treasuries.
These factors combine to make XWEB’s holdings too risky for today’s landscape, and land it on this list of tech funds to dump. If you’re bullish on tech, it’s best to hold a tech-heavy broad market index and, if you want to capture some small-cap potential, screen for the few firms offering profitability without assuming unsustainable debt.
Ark Fintech Innovation ETF (ARKF)
Expense ratio: 0.75%, or $75 annually on a $10,000 investment
Cathie Wood’s funds are past their prime, and Ark Fintech Innovation ETF (NYSEARCA:ARKF) might be the worst one standing. Like XWEB, ARKF weights liquidity as the expense of value and quality, meaning it suffers the same potential perils. Furthermore, the fund itself hasn’t generated the returns you’d expect from such a risky play – even along a long timeframe. The ETF’s five-year risk-adjusted success ratio is 0%, meaning the risk outweighs the slim returns it has generated.
Furthermore, the fund’s holdings aren’t as fintech-focused as you may think. Fintech and innovative financial processes are rocking legacy institutions, but ARKF holds strange stocks like Teladoc (NYSE:TDOC) and Roblox (NYSE:RBLX). Ultimately, ARKF suffers from the same struggles as other Ark funds: it comprises Cathie Wood’s favorite companies first and focuses on the actual ETF’s theme second.
Fintech stocks vary widely, but picking ARKF exposes investors to firms only peripherally related to the industry. You’d be better off investing in a few proven, quality fintech firms instead of relying on Ark to do your due diligence. Consider it one of your tech funds to get rid of before it’s too late.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
