Some of the hottest technology stocks and funds of recent months have fallen into bear market territory and investors are betting on more turmoil to come, as rising bond yields undermine the case for holding high-priced shares.
A Friday afternoon stock market rally notably failed to include shares in Tesla and exchange-traded funds run by Cathie Wood, the fund manager who has become one of the electric carmaker's most vocal backers.
Shares in Tesla fell 3.6 per cent on Friday to close below US$600 for the first time in more than three months, although it had been down as much as 13 per cent at one point. The stock is down 32 per cent from its January peak, erasing US$263bn in market value.
Wood's $21.5bn flagship Ark Innovation ETF — 10 per cent of which is invested in Tesla shares — also closed lower on Friday. It is now down 25 per cent and in a bear market, defined as a decline of more than one-fifth from peak.
The speculative tech trade is in various stages of rolling over right now.
Nicholas Colas, DataTrekClean energy funds run by Invesco, which were last year's best-performing funds, are also in bear market territory, along with some of the highest-flying stocks in the technology and biotech sectors.
"Bubble stocks and many aggressively priced US biotechnology stocks have been the hardest hit segments of the equity market," said Peter Garnry, head of equity strategy at Saxo Bank.
The tech-heavy Nasdaq Composite index fell into correction territory — defined as a decline of more than 10 per cent from peak — earlier this week but rebounded 1.6 per cent on Friday as bond yields stabilised.
The yield on 10-year US Treasuries briefly rose above 1.6 per cent early in the day after a robust employment report for February buoyed confidence in a US economic recovery. Yields were less than 1 per cent at the start of the year.
Rising long-term bond yields reduce the relative value of companies' future cash flows, hitting fast-growing companies particularly hard.
These type of companies figure prominently in thematic investing funds run by Wood at Ark Investments. The performance of Ark's exchange traded funds has abruptly reversed after they recorded huge inflows and strong gains for much of the past 12 months.
"The speculative tech trade is in various stages of rolling over right now," said Nicholas Colas, co-founder of DataTrek, a research group.
RBC derivatives strategist Amy Wu Silverman said investors were still putting on hedges in case of further declines in high-flying securities, including options that would pay off if Tesla and the Ark Innovation fund drop in value.
The number of put options on the Ark fund hit an all-time high on Thursday, according to Bloomberg data. By contrast, demand for put options on ETFs such as State Street's SPDR S&P 500 fund — which reflects the broader stock market — have fallen as stocks have dropped.
Demand for options normally slides as a stock or ETF slumps in value, given there was "less to hedge, since you got your down move", Silverman said. The elevated put option activity on speculative tech stocks and funds was "suggesting investors believe there is more to go", she said.
Even after the declines, stocks in the Ark Innovation ETF remain highly valued, with a median price-to-sales ratio of 22 versus 2.5 for the broader stock market, according to Morningstar, the data provider.
Two of the fund's other big holdings, the streaming company Roku and the payments group Square, were also lower on Friday, extending recent declines.
Ark's other leading ETFs have also retreated sharply as air has come out of Tesla and other hot stocks. The electric car maker is the largest holding in Ark's $3.3bn Autonomous Tech and Robotics fund and its $7.2bn Next Generation Internet ETF.
Wood has also taken concentrated holdings in small, innovative companies. Ark holds stakes of more than 10 per cent in 26 small companies across its five actively managed ETFs, according to Morningstar.
"These large stakes raise concerns around capacity and liquidity management," said Ben Johnson, director of passive funds research at Morningstar. "The more of a company the firm owns, the more difficult it will be to add to or reduce its position without pushing prices against fund shareholders."
Ark did not respond to a request for comment. The Ark Innovation ETF is still sitting on a performance gain of 120 per cent for the past year. It bought more shares in Tesla when the carmaker's shares began falling last month.
- Financial Times