Over the past week, sentiment surrounding tech companies has turned negative, as a massive sell-off of major Nasdaq names has dominated headlines amid growing fears of inflation and a subsequent spike in Treasury yields.
Most notably, Tesla shares have been at the forefront of the speculation, plunging by more than 30% this month following a January high of $868, and causing shareholders to lose a collective $300 billion. However, it is no longer just Tesla investors that are stuck carrying the weight of defeat: numerous ETFs that have been tied to Tesla’s success over the past year are now being pulled down amid the company’s poor performance.
In fact, According to Bloomberg, “at one point on Friday, every one of the 54 US-based ETFs that have assets under management exceeding $1 billion and more than 1% invested in Tesla have fallen.” Among the ETFs that have been hammered in the market has been Cathie Wood’s flagship Ark Innovation ETF, which has erased all 2021 gains as a result of the tech selloff. According to some analysts though, the significant size of one stock such as Tesla could cause profound effects in the market should it plunge even further.
Mohit Bajaj, who is the director of ETFs for WallachBeth Capital, recently told Bloomberg that those ETFs holding a significant weight in one stock could add further downward pressure on the stock if there is a selling of the fund— and vice versa. Likewise, James Pillow, who is the managing director at Moors & Cabot Inc noted that “high-flying” stocks such as Tesla are a good investment when there is momentum behind them, but once that fizzles out due to liquidity, such stocks tend to crash down a lot faster than they rose. “Holding such high fliers is a significant risk to concentrated portfolios, and frankly its a risk for the confidence in the entire stock market,” he concluded.
In short, what goes up, comes crashing down— even faster.
Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
