What's ailing tech? Investors are not waiting to find out

Traders working on the floor at the closing bell of the Dow Industrial Average at the New York Stock Exchange on March 19, 2018.
Traders working on the floor at the closing bell of the Dow Industrial Average at the New York Stock Exchange on March 19, 2018. PHOTO: AFP

NEW YORK (BLOOMBERG) - Tech shares took a beating again on Thursday (March 22) and investors are fleeing exchange-traded funds tracking the industry.

Since Monday, US$2.5 billion has been yanked from the biggest technology-heavy ETF, the PowerShares QQQ Trust Series 1, better known by its ticker QQQ. Other funds are seeing similar outflows as well. Meanwhile, the Nasdaq 100 is heading for its worst week since the early February correction.

The main trigger for the action appears to be the controversy over the use of Facebook user data by political-advertising firm Cambridge Analytica. Shares of the social network have fallen more than 10 per cent this week, and if the decline holds it will be the worst week for the stock since 2014. In addition, fears of a trade war are mounting as US President Donald Trump slapped tariffs on $50 billion of Chinese goods.

"The entire technology complex is worried about what (Facebook founder) Mark Zuckerberg said last night, that maybe we should be regulated," said Jamie Cox, a managing partner for Harris Financial Group in Richmond, Virginia. "All of a sudden you have all of these technology companies that are going, 'I can't believe he said that,' because that would basically hurt technology companies' earnings potential."

The social media giants' problems aren't the sole reason for the tech slide, though. There's also Trump's China tariffs stemming from intellectual-property violations. If China retaliates and a trade war erupts, US-based technology companies with operations overseas could suffer.

"Some of the parts are made in China, you have that relationship," said Quincy Krosby, chief market strategist at Prudential Financial Inc. "As the Chinese economy picks up, the Chinese have more disposable income to enjoy technology. We also know the Chinese are becoming more and more sophisticated with technology."

Last year, 20 per cent of Apple's revenues came from China, according to Bloomberg data. For Intel Corp, revenue from China was 24 per cent. Both tech behemoths were down Thursday.

 

US-listed shares of Chinese companies are also feeling the heat. The American depositary receipts for Baidu Inc and Alibaba Group Holding showed both Chinese tech giants under substantial pressure, both falling more than 4 per cent.

CRISIS SPREADING

But the big news remains Facebook, which has been struggling ever since news of the data breach broke, as investors worry that the government could impose regulations on the entire social media industry. Zuckerberg spoke out Wednesday, outlining steps aimed at mitigating chances of a future leak. But he wasn't able to appease critics.

The company's crisis has spread to the broader technology sector, as seen in Nasdaq's decline and outflows from ETFs that until recently had been Wall Street darlings.

Of the nearly 1,500 US equity ETFs tracked by Bloomberg, only eight funds have attracted more cash this year than QQQ. Indeed, it had its third largest weekly inflow on record just last week. But since Monday, investors have been racing away from the US$63 billion ETF.

Facebook is the ETF's fourth largest holding and Apple is its biggest. The other so-called FAANG stocks - Facebook, Apple, Amazon.com, Netflix and Google parent Alphabet - are also well represented in the portfolio. An equal-weighted index of the five companies is down 4.8 per cent this week.

Investors also are turning their backs on State Street's Technology Select Sector SPDR Fund, ticker XLK, in which Facebook is the third biggest holding and Apple is the largest. The ETF has seen outflows four of the last five days. Before that, the fund had six straight days of inflows.