GICS Sector ETFs: Is XLE’s Rally Sustainable?
Highly concentrated sector flows
US GICS Sector ETFs witnessed aggregate net inflows of ~$800 million last week. As you can see in the chart below, fund flows were rather concentrated—both in terms of inflows and outflows.
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On the inflow side, investors largely focused on three particular sectors. The Energy Select Sector SPDR Fund (XLE), the Financial Select Sector SPDR Fund (XLF), and the Technology Select Sector SPDR Fund (XLK) made up ~96% of total inflows. On the other side of the spectrum, the Industrial Select Sector SPDR Fund (XLI) witnessed outflows of ~$220 million, representing ~75% of last week’s net outflows. The concentrated flow picture reflects that market participants zoomed in on a few key developments that unfolded last week. Let’s examine the inflows into XLE more closely.
Energy (XLE) ranks first in performance and fund flows
The highly-liquid energy giant XLE ranked first in terms of inflows. Investors poured ~$470 million in cash into XLE. A weekly gain of ~2.5% was supportive, leading to a fresh YTD high on Thursday. Within the broader picture of 2016’s market action, XLE is now the top-performing GICS sector ETF on a year-to-date basis with a gain of ~16.7%. Even more telling is the fact that it also ranks first in terms of YTD capital inflows among GICS sector ETFs as investors allocated ~$1.4 billion into the energy ETF.
Recent gains in both fund flows and performance reflect a rebound in the price of crude oil (CL1). Prices have rallied ~22.8% from their August 2 lows, which technically means crude oil has entered bull market territory. A gain of at least ~20% in a tradable asset is the “classic definition” of a bull market. These gains have largely resulted from speculations about the introduction of possible production caps by OPEC and Russia. Plus, last week’s data showed that US crude and gasoline stockpiles dropped, lowering concerns about a global supply glut. Keeping these factors in mind, we see that the market cap–weighted XLE, which is dominated by oil and gas companies that benefit from rising oil prices, was pushed higher. Just consider that Exxon Mobil (XOM) and Chevron (CVX) make up ~32% of XLE’s portfolio. Both stocks have posted sizable year-to-date gains of ~12.6% and ~13.7%, respectively.
Recent inflows into XLE have been remarkable, possibly indicating that investors are positioning for more upside to come. Whether you’re a bull or a bear, it’s certainly worth keeping an eye on fund flows developments in XLE over the next weeks and months.