Some of the hottest stocks and tech funds in recent months have fallen into bearish territory and investors are betting on further turbulence to come as rising bond yields undermine the case for holding high priced stocks .
Friday afternoon stock market rally Notably, it failed to include Tesla shares and exchange-traded funds managed by Cathie Wood, the fund manager who has become one of the electric carmaker’s most vocal backers.
Shares in You’re here fell 3.6 percent on Friday to close below $ 600 for the first time in more than three months, even though it had fallen as much as 13 percent at one point. The stock is down 32% from its January high, wiping out $ 263 billion from market value.
Wood’s $ 21.5 billion flagship Ark Innovation ETF, 10% of which is invested in Tesla shares, also closed lower on Friday. It is now down 25% and in a bear market, defined as more than a fifth drop from the peak.
Clean energy funds managed by Invesco, which were the best performing funds last year, are also on the downside, along with some of the best performing stocks in the tech and biotech sectors.
“Bubble stocks and many aggressively priced US biotech stocks have been the hardest hit segments of the stock market,” said Peter Garnry, head of equity strategy at Saxo Bank.
The high-tech Nasdaq Composite Index fell into corrective territory – defined as a drop of more than 10% from the peak – earlier this week, but rebounded 1.6% on Friday as bond yields rose. stabilized.
The yield on 10-year U.S. Treasuries briefly exceeded 1.6% early in the day after a employment report for February boosted confidence in an economic recovery in the United States. Yields were below 1 percent at the start of the year.
Rising long-term bond yields reduce the relative value of future corporate cash flows, especially hitting fast-growing companies.
These types of companies feature prominently in the thematic investment funds managed by Wood at Ark Investments. Ark’s exchange-traded funds’ performance turned sharply after seeing huge inflows and strong gains for much of the past 12 months.
“Speculative tech trading is in various stages of recovery right now,” said Nicholas Colas, co-founder of DataTrek, a research group.
RBC derivatives strategist Amy Wu Silverman said investors continue to put hedges in place in the event of a further decline in high-profile securities, including options it would pay off if Tesla and the Ark Innovation fund lost value.
The number of put options on the Ark fund hit a record high on Thursday, according to Bloomberg data. In contrast, demand for put options on ETFs such as State Street’s SPDR S&P 500 fund – which mirrors the larger stock market – has fallen as stocks have fallen.
Demand for options normally slips as the value of a stock or ETF falls, as there was “less to cover, since you’ve made a downward movement,” Silverman said. The high put option activity on stocks and technology hedge funds “suggested to investors that there was more to do,” she said.
Even after the declines, shares in the Ark Innovation ETF remain highly valued, with a median price-to-sell ratio of 22 versus 2.5 for the entire stock market according to The morning star, the data provider.
Two of the fund’s other big holdings, streaming company Roku and payments group Square, also fell on Friday, extending recent declines.
Ark’s other major ETFs also fell sharply as the air came out of Tesla and other hot stocks. Tesla is Ark’s largest stake of $ 3.3 billion Autonomous technology and robotics fund and its $ 7.2 billion Next Generation Internet AND F.
Wood has also taken holdings concentrated in small innovative companies. Ark owns more than 10% stakes in 26 small companies through its five actively managed ETFs, according to The morning star.
“These important issues raise concerns about capacity and liquidity management,” said Ben Johnson, director of passive fund research at Morningstar. “The more the company owns a company, the more difficult it will be to increase or decrease its position without pushing prices against the shareholders of the fund.”
Ark did not respond to a request for comment. The Ark Innovation ETF is still sitting on a performance gain of 120 percent over the past year. He bought more Tesla shares when the automaker’s shares started falling last month.