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Oct 29, 2020

Stock rout pushes tech ETFs toward worst outflow since May 2019

Larry Berman on social media stocks and antitrust

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Whether it’s election jitters, virus concerns or old-fashioned bubble fears, the invincible halo surrounding American tech stocks this year is finally fading.

Investors are on course to pull the most money out of technology-focused exchange-traded funds since May last year, according to data compiled by Bloomberg. More than US$1.5 billion has exited so far in October.

Tech names were among the hardest hit on Wednesday as the S&P 500 dropped the most since June amid growing fears the resurgent coronavirus will derail an economic rebound. Futures on Thursday pointed to a small bounce for the Nasdaq 100, nowhere near enough to erase miserable losses this week.

“They’ve been seen as this sector set apart from the rest of the economy because the profits have kept coming in,” said Tim Courtney, chief investment officer of Exencial Wealth Advisors. “That will start to be tested if this continues to drag on and consumer spending doesn’t get back to where it was.”

While the U.S. benchmark gauge fell 3.5 per cent to close at the lowest in five weeks on Wednesday, tech shares in the index sank 4.3 per cent overall and Alphabet Inc. and Facebook Inc. both tumbled more than 5 per cent.

Against that backdrop, Invesco’s QQQ Trust Series 1 ETF (QQQ) saw US$434 million of withdrawals. It’s leading October outflows with US$1.3 billion, while its tripled-leveraged peer TQQQ is also on track for a loss.

Of course, the depth and speed of cash in this corner of the market mean tech ETF outflows could reverse in the final two trading days of the month. Sentiment surrounding the sector can change fast, and options activity has been booming. QQQ in particular has recently seen outsized flows in both directions.

Key to a reversal could be the earnings of Apple Inc., Amazon.com Inc., Facebook and Alphabet, all of which report on Thursday after the close. Even solid results may not be enough to turn the tide -- Microsoft Corp.’s third-quarter profit beat expectations on Tuesday, but its stock plunged almost 5 per cent in the next session.

“This is a temporary setback for tech,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “Once the election is behind us and interest rates have found their new levels and stimulus is back on the table, the market will find its footing, and we’ll see some of the old trends reassert themselves.”