Why Square, Roku, Teladoc, and Shopify all dropped out on Friday
The shares of some of the hottest tech stocks in the market fell on Friday and there’s a good reason stocks are moving in unison. Square (NYSE: SQ) dropped to 12.4% at the start of the day, Roku (NASDAQ: ROKU) fell 10.4%, Shopify (NYSE: SHOP) was down 11.1%, and Teladoc Health (NYSE: TDOC) fell 11.2%. As of 1:40 p.m. EST, Square shares were down 2%, Roku up 0.2%, Shopify down 3.1%, and Teladoc down 4.3%.
One of the main reasons these growth stocks are declining is that they are large holdings of the ARK Innovation ETF (NYSEMKT: ARKK) controlled by Cathie Wood. Investors turned against the fund and with multi-billion dollar outflows per week, Wood has become the target of some short-term traders.
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First of all, a big reason growth stocks are falling today is because investors are worried about rising interest rates, which can slow growth and even be a signal of inflation. When rates rise, it increases the rate at which investors discount future earnings, which actually means growth stocks become less valuable. That’s why we’re seeing a decline today in large segments of the market, including high growth tech stocks like Square, Roku, Shopify, and Teladoc Health.
The other more complicated reason for the sale is ARK Innovation itself. The ETF has actually been long in all four of these stocks over the past few days, but that might be the problem. According to The Wall Street Journal, Wood’s ETFs posted outflows of $ 1.8 billion between February 24 and March 1. When a fund has exits, it must sell underlying stocks to pay investors for their redemptions. This can create downward pressure on larger ARK Innovation holdings, like Square, Roku, Shopify, and Teladoc.
It might seem like a strange reason for an ETF to fall, but when redemptions in a large fund like this start to occur, it can cause a domino effect. Big investors see buyouts, short sellers walk away before more buyouts, investors panic and sell falling stocks and ETFs, and the cycle continues. Eventually, this momentum stops, but in the meantime, ARK Innovation’s shares and the shares in which it holds positions may fall.
Days like this are painful but quite normal for the stock market. Investors can panic about fluctuations in interest rates and politics, which ultimately won’t determine where growth stocks like this go over the next decade or more. So, for long-term investors willing to buy and hold, this can be a buying opportunity.
The momentum in ARK’s ETFs is also likely to be short-lived. This type of market dislocation can be a hot topic for media and traders for 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. his company’s portfolio isn’t It’s not an ETF I would bet against.
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