Tech, High Growth ETFs Buckle Amid Spiking Rates

April 11, 2022

ETFs holding high growth and high valuation stocks buckled on Monday, as a seemingly never-ending spike in interest rates dragged down shares of the relatively rate-sensitive companies.  

The Vanguard Information Technology ETF (VGT) shed 2.1%, the SPDR S&P Biotech ETF (XBI) lost 3.5%, the ARK Innovation ETF (ARKK) sagged 1.9% and the Renaissance IPO ETF (IPO) fell by 0.83% by midday. 

These were all areas of the market that were hit hard in the early part of 2022 as spiking interest rates compressed valuations. But the ETFs got a reprieve in the second half of March as bargain hunters swooped in, sending share prices up by 10%, 20% or more in a matter of days. 

Some investors reasoned the downdraft in these once-high-flying ETFs had gone on long enough, and that higher interest rates were already priced into valuations. But the most recent rally in rates is testing those convictions. 

The U.S. 10-year Treasury yield has risen for seven straight sessions. In that period, the yield has surged from 2.34% to 2.79%—a three-year high.  

 

US 10-Year Treasury Bond Yield 

 

VGT, an ETF dominated by tech giants like Apple and Microsoft, has given up more than half of its recent rebound, though the ETF is still a ways from its mid-March lows. At those lows, the ETF, which tracks the broad information technology sector, was down 21% from its all-time highs. Currently, it’s down about 16%.  

 

VGT 


 

ARKK, whose portfolio is made up of riskier stocks than those in VGT, has similarly given up half of its recent gains. From its all-time highs, the fund was down a whopping 67% at its mid-March lows; it’s currently down 62%.  

 

ARKK 

 

Where We Go From Here  

There are two ways to interpret the latest price action in these ETFs. On the one hand, the fact that they aren’t making new lows despite multiyear highs in interest rates could be construed as a positive.  

On the other hand, there doesn’t seem to be any letup in the spike in rates. The Fed is as hawkish as ever and inflation has yet to peak. The latest reading on U.S. inflation that comes out on Tuesday may go a long way in determining whether the prevailing trends continue uninterrupted, or the narrative begins to shift ever –so slightly.  

The Bureau of Labor Statistics is expected to report an acceleration in headline and core CPI year-over-year growth to 8.4% and 6.6%, respectively. Both would be 40-year highs. 

 

Follow Sumit Roy on Twitter @sumitroy2  

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