Some of the most popular technology stocks and funds of recent months have fallen in the bear market area and investors are betting on more turmoil as rising bond yields undermine the case for holding expensive stocks.
On a Friday afternoon stock market in particular, shares in Tesla and exchange-traded funds could not be included by Cathie Wood, the fund manager who became one of the main supporters of the electric car maker.
Shares in Tesla fell 3.6 percent on Friday and closed below $ 600 for the first time in more than three months, although at one point they fell as much as 13 percent. The stock fell 32 percent from its peak in January, wiping out $ 263 billion in market value.
Wood’s $ 21.5 billion Ark Innovation ETF – 10 percent of which is invested in Tesla shares – also closed lower on Friday. It is now 25 percent lower and in a bear market it is defined as a decrease of more than a fifth from the peak.
Clean energy funds managed by Invesco, which was the best performing fund last year, are also in the bear market area, along with some of the strongest stocks in the technology and biotechnology sector.
“Bubble stocks and many U.S. biotechnology stocks with an aggressive price were the segments hit hardest on the stock market,” said Peter Garnry, head of Saxo Bank’s equity strategy.
The technically heavy Nasdaq Composite Index fell in the correction area earlier this week – defined as falling more than 10 percent from the peak – but recovered 1.6 percent on Friday as yields stabilized on bonds.
Yields on 10-year U.S. treasury yields rose sharply to more than 1.6 percent early in the day after a strong employment report for February boosted confidence in a U.S. economic recovery. The return at the beginning of the year was less than 1 percent.
Rising long-term rates of return are lowering the relative value of companies’ future cash flows, hitting fast-growing companies particularly hard.
These types of companies are prominent in thematic investment funds managed by Wood at Ark Investments. The performance of Ark’s exchange traded funds has suddenly turned around after recording major impacts and strong gains over the past twelve months.
“The speculative technology trade is currently evolving,” said Nicholas Colas, co-founder of DataTrek, a research group.
Amy Wu Silverman, RBC’s derivative strategist, said investors are still hedging in the event of further declines in high-flying bonds, including options that will bear fruit if Tesla and the Ark Innovation fund fall in value.
According to Bloomberg’s data, the number of put options in the Ark fund peaked on Thursday. In contrast, demand for put options on ETFs, such as the State Street SPDR S&P 500 fund – which reflects the broader stock market – declined as equities declined.
Demand for options usually shifts as a stock or as an ETF drop in value, as there ‘is less to hedge as you have a downward movement’, Silverman said. The increased put option activity on speculative technology stocks and funds suggests investors believe there is more to go, she said.
Even after the decline, shares in the Ark Innovation ETF remain high on price, according to Morningstar, the data provider, with an average price-to-sell ratio of 22 versus 2.5 for the broader stock market.
Two of the fund’s other major stocks, streaming company Roku and payments group Square, were also lower on Friday, extending recent declines.
Ark’s other leading ETFs also retreated sharply as air came out of Tesla and other hot stocks. Tesla is the largest shareholder in Ark’s $ 3.3 billion Autonomous Tech and Robotics fund and its $ 7.2 billion Next Generation Internet ETF.
Wood has also taken concentrated businesses into small, innovative companies. Ark holds more than 10 percent stake in 26 small businesses in its five actively managed ETFs, according to Morningstar.
“These major interests raise concerns about capacity and liquidity management,” said Ben Johnson, director of passive fund research at Morningstar. “The more a company owns the company, the harder it will be to add or reduce its position without placing prices against fund shareholders.”
Ark did not respond to a request for comment. The Ark Innovation ETF has continued to make a 120 percent performance gain over the past year. It bought more shares in Tesla when the carmaker’s shares began to decline last month.