Let's Go Treasure Hunting Inside the ETF Tech Scrapyard

In my early teens, my gearhead brother would drag me out to random barns and junkyards in Ontario, Canada. We would go searching for not just the one part he needed, but also see what other treasures we could find. We weren't always successful, but we always had adventure. When we did score, it was awesome, even if it was only for storytelling, like the time we saw a 400-ish horsepower 426 Hemi on an engine stand in a guy's living room and discovered he was shoehorning it into a late 60's Dodge Dart. Not all heroes wear capes. Given the current state of the markets, I thought it might be interesting to poke around the detritus left by the Fed's four month and counting attempt to control something it spent almost a decade manufacturing as rate hikes and balance sheet cutting begin to hit the markets. Sorting Through the Rubble Looking at year-to-date returns throughout the unlevered ETF landscape, leading the way to the deepest crater are the VanEck Russia ETF and VanEck Russia Small-Cap ETF , which are down 78.80% and 66.30%, respectively. These funds saw trading suspended in early March, but my take is even if Russia extracts itself (or is extracted) from its current global position from an economic perspective, I don't see those markets coming back to anywhere near their former prominence. If you've got a generational investment timeline then perhaps these funds might look interesting once they start trading again but otherwise, I'd let this particular sleeping dog lie. The next grouping of funds hit almost as hard as Russia are a number of funds focused on Fintech and Blockchain like the Global X Blockchain ETF and the First Trust SkyBridge Crypto Industry & Digital Industry ETF , both down 64% year-to-date to May 11, 2022. Looking through the holdings for BKCH I do see some names like PayPal , Block , and Nvidia that will survive this current regime change but there are a lot more names like Riot Blockchain , Hive Blockchain , which are down over 80% from 52-week highs and, given the current and near-term outlook for non-fungible tokens, (NFTs) and cryptocurrencies, especially what I'll call non-mainstream coins (known colloquially as sh*tcoins) I don't see this space returning to anything resembling former glory any time soon. The next group are funds from the industry's latest punching bag, ARK Investments, and show up in a row including ARK Fintech Innovation , ARK Innovation ETF , and ARK Next Generation Internet ETF down, 61.70%, 61.00%, and 59.60%, respectively. Looking at the flagship fund ARKK, there are some names that will exit the current unpleasantness with some solid foundations like founder favorite Tesla and Block , but there are a lot of names that have a tough road ahead like Robinhood Markets , Teladoc , DraftKings and Coinbase . Still, with fund inflows reaching $1.4 billion this year ($1.18 billion in the past month alone) investors are clearly comfortable with taking a long view on Innovation Investing. All I'll say here is Caveat Emptor. Also in the down over 50% segment are two funds that focus on the psychedelics space Defiance NextGen Altered Experience ETF and Advisors Shares Psychedelics ETF . I wrote about these funds back in February and still think that starting to accumulate a small set-it-and-forget-it position at these levels looks attractive. The list goes on into a list of other Blockchain, Fintech, and other tech-oriented names like the Simplify Volt Fintech Disruption ETF , Invesco Alerian Galaxy Crypto Economy ETF , and the Direxion Moonshot Innovators ETF , all down over 50% year-to-date (as of Wednesday). Sprinkled through are cannabis funds like Advisor Shares Pure Cannabis ETF and the Cannabis ETF , which have fared slightly better in the down over 40% group as opposed to 50%. This whole sector seems to be stuck in regulatory purgatory as the SAFE banking act seems perpetually stalled in the Senate. Given how tax-revenue-hungry states are, I'm surprised that SAFE hasn't been passed already, but politics gonna' politic, as they say. Also starting to pop up in this list are some surprising names like the Invesco WilderHill Clean Energy ETF , down 40% year-to-date. What didn't surprise me was seeing a number of special purpose acquisition company-oriented strategies like Morgan Creek - Exos SPAC Originated ETF and Defiance Next Gen SPAC Derived ETF . The Takeaway As the Fed's attempting to control inflation and guide the economy to as soft a landing -- as soft as it can manage -- everyone is putting on the brakes as we pivot away from the promise of a better tomorrow to (if you'll excuse me for mixing metaphors) the current bird in hand. Fundamentals will become increasingly important to investors and while there are pockets of fundamental strength in many of the strategies and funds that focus on tech, there are some segments that have relatively strong fundamentals, particularly cloud computing and cybersecurity. For whatever reason, these too, have been taken down quite aggressively and represent an increasingly attractive entry point as we work through the next few months and quarters.

Let's Go Treasure Hunting Inside the ETF Tech Scrapyard

As the Fed tries to steer the smoking U.S. economy into a soft landing, many funds have been reduced to cyber rubble. But we can find some working -- or workable -- parts amid the rust and embers.

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