Some of the hottest stocks and technology funds in recent months have fallen into bear market territory and investors are betting on more turmoil to come, as rising bond yields hamper the case for holding high-priced stocks.
A stock market recovery on Friday afternoon has notably 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 biggest supporters.
Tesla’s shares fell 3.6 percent on Friday to close below $ 600 for the first time in more than three months, although it fell by 13 percent at one point. The stock fell 32% from its January peak, eliminating $ 263 billion in market value.
Wood’s $ 21.5 billion Ark Innovation ETF – 10% of which is invested in Tesla shares – also closed lower on Friday. It is now 25 percent below and in a bear market, defined as a decline of more than a fifth from the peak.
The clean energy funds managed by Invesco, which were the best performing funds of the past year, are also in low market territory, along with some of the best performing stocks in the technology and biotechnology sectors.
“Bubble stocks and many US biotech stocks with aggressive prices 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 correction territory – defined as a drop of more than 10 percent since the peak – earlier this week, but rebounded 1.6 percent on Friday, as bond yields have stabilized.
Yield on 10-year US Treasury bonds briefly rose above 1.6 percent earlier in the day, after a robust February employment report boosted confidence in the US economic recovery. Yields were less than 1 percent at the beginning of the year.
Increasing yields on long-term securities reduce the relative value of companies’ future cash flows, affecting particularly fast-growing companies particularly hard.
This type of company is highlighted in thematic investment funds managed by Wood at Ark Investments. The performance of Ark’s exchange-traded funds abruptly reversed after they recorded huge inflows and strong gains during most of the past 12 months.
“The speculative technology trade is at various stages of evolution now,” said Nicholas Colas, co-founder of DataTrek, a research group.
RBC derivatives strategist Amy Wu Silverman said that investors are still hedging in the event of further declines in high-value securities, including options that would pay if Tesla and the Ark Innovation fund fell in value.
The number of put options for the Ark fund reached an all-time high on Thursday, according to Bloomberg data. In contrast, demand for ETF put options, such as State Street’s SPDR S&P 500 fund – which reflects the broader stock market – fell as stocks fell.
Demand for options typically declines as the shares or ETF value plummets, since there was “less to protect since you have lowered,” said Silverman. The high activity of stock options and technology hedge funds was “suggesting that investors believe there is more to do,” she said.
Even after the falls, ETF Ark Innovation shares remain highly valued, with a median price / sales ratio of 22 to 2.5 for the broader stock market, according to Morningstar, the data provider.
Two of the fund’s other big holdings, streaming company Roku and the payments group Square, also fell on Friday, extending the recent declines.
Ark’s other major ETFs also declined dramatically as the air left Tesla and other major stocks. The electric car maker is the largest stake in Ark’s $ 3.3 billion Autonomous Tech and Robotics fund and its $ 7.2 billion next-generation ETF.
Wood also acquired stakes in small innovative companies. Ark owns more than 10 percent stakes in 26 small businesses in its five actively managed ETFs, according to Morningstar.
“These large holdings 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 pressing prices against the fund’s shareholders.”
Ark did not respond to a request for comment. Ark Innovation ETF is still sitting on a 120 percent performance gain last year. It bought more Tesla shares when the automaker’s shares started falling last month.