Yield Spikes Muddy ARK’s Waters

The suite of technology-heavy ARK Invest ETFs led by Cathie Wood has hit choppy waters as the rest of the market rotates away from tech stocks.

The flagship ARK Innovation ETF (ARKK), the ARK Fintech Innovation ETF (ARKF) and the ARK Genomic Revolution ETF (ARKG) have all lost more than 10% in the first week of the year as of 1:20 p.m. Eastern Time Thursday, amounting to deep losses for the three largest funds in the lineup.

The Invesco QQQ Trust (QQQ), widely seen as a benchmark for large cap, growth-oriented technology stocks, has lost 3.33% in the same time period.

A more hawkish tune from the Federal Reserve is top among drivers for the tech rout, as Wednesday’s release of the December FOMC meeting minutes showed an increasing tilt toward hiking interest rates faster than previously thought to fight inflation. Tech and growth stocks generally suffer in rising-rate environments as tighter monetary policy can lower growth expectations.

The five-year Treasury yield has risen past the prepandemic 1.425% high in February 2020, while the benchmark 10-year Treasury yield rose past 1.73% during the week, marking a new high since last March.

That sets up a potentially difficult few months for the actively managed suite of ARK ETFs, particularly after posting minor gains in the ARK Autonomous Technology & Robotics ETF (ARKQ) and losses near or above 20% for the other funds with more than $1 billion in assets.

While that positions the disruption-focused funds for a rough short-term period, analysts believe big-name technology companies are set for a stronger long-term run.

Ed Moya, a senior market analyst at OANDA, says markets are rushing to price in up to three rate hikes during the year and an expected wind-down of its balance sheet. That’s a boon to cyclical stocks over the next several months, but he expects the selling pressure for tech stocks to calm after the Fed’s first rate hike.

He also believes technology names will come back into rotation as a safe haven in 2023 and beyond despite not having record-breaking growth, noting that the sector became a haven in the onset of the pandemic.

“When people become very concerned, and when we're talking about the 10-year at 2%, people will be going back to tech, believe it or not,” he said.

Angelo Zino, technology analyst at CFRA Research, says there’s plenty of long-term opportunity in mega-cap stocks, but there will be a change in sentiment there for the time being.

“In the near term, I think there might be some concerns about what a more normalized state looks like for some of these tech companies in a post-pandemic world,” he said.

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