What happened
Shares of some of the hottest technology stocks on the market dropped big on Friday and there's a good reason shares are moving in unison. Square (SQ -1.57%) fell as much as 12.4% early in the day, Roku (ROKU 0.15%) dropped 10.4%, Shopify (SHOP -2.37%) was off 11.1%, and Teladoc Health (TDOC -0.07%) dropped 11.2%. As of 1:40 p.m. EST, shares of Square were down 2%, Roku was up 0.2%, Shopify was down 3.1%, and Teladoc was down 4.3%.
One big reason these growth stocks are down is that they're big holdings of the ARK Innovation ETF (ARKK 0.07%) controlled by Cathie Wood. Investors have turned against the fund and with outflows in the billions of dollars per week, Wood has become a target of some short-term traders.
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So what
First, a big reason growth stocks are down today is because investors have gotten worried about rising interest rates, which can slow growth and even be a signal of inflation. When rates rise it raises the rate at which investors discount future earnings, which really means growth stocks become less valuable. That's why we're seeing broad segments of the market trade lower today, including high-growth tech stocks like Square, Roku, Shopify, and Teladoc Health.
The other more complicated reason for the sell-off is ARK Innovation itself. The ETF has actually been a buyer of all four of these stocks in recent days, but that may be the problem. According to The Wall Street Journal, Wood's ETFs have had outflows of $1.8 billion between Feb. 24 and March 1. When a fund has outflows it needs to sell underlying shares to pay investors for their redemptions. That can create downward pressure on ARK Innovation's biggest holdings, like Square, Roku, Shopify, and Teladoc.
This may seem like a quirky reason for an ETF to fall, but when redemptions in a large fund like this start to happen it can cause a domino effect. Large investors see the redemptions, short-sellers get out ahead of further redemptions, investors panic and sell stocks and ETFs that are dropping, and the cycle continues. Eventually, this dynamic stops, but in the meantime shares of both ARK Innovation and the stocks it holds positions in can drop.
Now what
Days like this are painful but very normal for the stock market. Investors can panic over moves in interest rates and politics, which aren't going to ultimately drive where growth stocks like this go over the next decade or more. So, for long-term investors ready to buy and hold this can be a buying opportunity.
The dynamics hitting ARK's ETFs are also likely short-lived. These kind of market dislocations can be hot topics for the media and traders for a few days or weeks, but Cathie Wood has proven to be a good long-term investor and with some of the world's most innovative companies dominating her company's portfolio, this isn't an ETF I would bet against.
