There’s no room in the Ark ETF for technology’s sinking stocks amid industry’s sell-off
- Cathie Wood’s ARK Innovation ETF has bled about US$785 million in outflows over the past six days, according to data compiled by Bloomberg
- Drops in the likes of Twilio, Zoom Video Communications and Roku dragged down the ETF
The highest-flying tech names are getting no help from one of the sector’s usual lifelines amid a fierce sell-off that’s showing few signs of slowing.
Plunging US real yields -- which strip out the effects of inflation -- failed to stem a 2.9 per cent fall in Cathie Wood’s ARK Innovation exchange-traded fund (ARKK) on Thursday, now in the midst of its worst stretch since 2018.
The break-apart in riskier tech and real rates is a sea change in a relationship that’s held through much of the past year. With bonds offering a negative rate of return after stripping out inflation, speculative tech and growth have flourished as investors hunt for yield. That the decoupling is happening at a time when a standard explanation for weakness in equities is “concern about inflation” shows the challenges of assigning cause and effect to a market where everything from retail day-traders to options-fomented hedging is acting on prices.
“Even though the bond market is suggesting that tech should be doing better, commodities are what the equity market is listening to and that is causing less of a bid for technology,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “Commodities are whispering in the ear of the equity market and saying inflation is coming.”
A surge in everything from copper to corn prices has pushed the Bloomberg Commodity Spot Index to its highest level in almost a decade. Meanwhile, 2-year breakevens touched the highest level since 2008 on Wednesday. The market’s sensitivity to a potential rise in rates was on display this week, with the Nasdaq 100 careening lower after Treasury Secretary Janet Yellen said interest rates may have to rise moderately to keep the economy from overheating - a point she later walked back.
ARKK has bled about US$785 million in outflows over the past six days, according to data compiled by Bloomberg. Amid the carnage, hedge funds sold technology shares for seven straight days, cutting their exposure to the lowest since December, prime broker data compiled by Goldman Sachs Group show.
As growth gets hit, cyclically oriented sectors - those with earnings viewed as being more tied to economic swings - have pulled ahead. The financial and energy sectors have rallied 3.6 per cent and 6.9 per cent so far this week, respectively, putting both on track for their strongest showings since March.
“With the data continuing to suggest a faster than expected recovery, the recovery/reflation trade is winning and expensive growth becomes a source of funds,” said Dan Suzuki, Richard Bernstein Advisors’ deputy chief investment officer. “The rising inflation expectations indicate that people’s confidence in the reflation trade is picking up.”
