Cathie Wood has found a clever way to cash in on the banking chaos

Financial stocks collapse under the strain of a banking crisis. So how did Cathie Wood find a way to gain 20% on financial stocks this year?

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Simple: By investing outside of the mainstream financial sector. The ARK Fintech Innovation ETF by ARK Invest (ARKF) is big this year. It is the second best actively traded sector ETF this year, behind only Wood’s ARK Next Generation Internet ETF (ARKW), which corresponds to an increase of 27.7%.

And ARK Fintech Innovation even outperforms the Financial Select Sector SPDR (XLF) is down 8% and some bank stocks are in free fall. The collapse of Silicon Valley Bank and Signature Bank scares investors who fear trouble lurks across the financial sector.

“ARKF is a fintech innovation ETF and has a large allocation to technology and crypto stocks, which have actually become more attractive given the recent drop in yields,” said Roxanna Islam of VettaFi. “It doesn’t hold traditional banking stocks, which have received most of the negative sentiment.”

How wood scores in the financial crisis

Ark Fintech Innovation’s surprise rise this year isn’t just about meeting a few lucky winners. More than 75% of the ETF’s 27 holdings are higher.

Coinbase Global (COIN), a cryptocurrency marketplace, is by far the biggest driver of ARK Fintech Innovation’s outperformance this year.

The stock is #1 in the ETF and accounts for almost 12% of the portfolio. And that outsize bet is paying off well this year. Shares are up nearly 83% this year alone. It’s also the highest percentage gain of any stock in the ARK Fintech portfolio.

Coinbase shares are recovering in part due to this year’s rally in many of the worst-performing stocks of 2022. In addition, the company is aggressively cutting costs and seeking new revenue-generating subscription-based services and offerings for professional investors, says CFRA’s David Holt in one Report.

The ETF’s next best percentage winner is NVIDIA (NVDA), a computer chip maker unaffiliated with financial stocks. It’s up 66% this year. Why is Nvidia in Woods Financial ETF? The company’s semiconductors typically process cryptocurrency transactions.

Cryptocurrency exposure itself is unlikely to move Nvidia stock. The Bitcoin price, for example, has fallen more than 40% in the last 12 months. But it turns out the company’s chip designs are also being used in artificial intelligence. And this is the hottest tech trend going after the rise of ChatGPT.

What about traditional financial ETFs?

But what to make of the more traditional approaches to the sector as Wood’s financial ETF progresses?

All eyes on the SPDR S&P Regional Banking ETF (KRE) and iShares US Regional Banks ETF (IAT), says Islam. They are down 24% and 26.7% respectively this year.

“Many are looking for an entry point at low prices,” she said. “But there is still a lot of volatility within the sector, especially as more news emerges,” said VettaFi’s Islam.

For now, Islam says bank investors are best off waiting. Attempting to call a bottom now is dangerous as regulators’ reactions could either help or hurt bank ETFs.

“Regional bank ETFs could have value at lower prices,” she said. But “it’s difficult to predict an entry point with sustained volatility…we could see prices going either way.”

Top Stocks by Cathie Woods ARK Fintech Innovation

Sources: IBD, ARK Invest, S&P Global Market Intelligence

Follow Matt Krantz on Twitter @dull wreath

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