Sector ETFs: Selling into Upside Breakouts?
Another week of aggregate outflows
US GICS sector ETFs witnessed a second consecutive week of net outflows. In aggregate, investors pulled out ~$400 million.
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Looking at the above chart, you can see that last week’s GICS sector ETF flows were rather concentrated. In fact, ~90% of total outflows were attributable to only three out of nine sector ETFs—the Health Care Select Sector SPDR Fund (XLV), the Technology Select Sector SPDR Fund (XLK), and the Financial Select Sector SPDR Fund (XLF). On the other side of the spectrum, ~93% of total inflows went into two ETFs—the Industrial Select Sector SPDR Fund (XLI) and the Energy Select Sector SPDR Fund (XLE). Why might this be the case? Read on.
GICS sector flows reflect selling pressure at upside breakouts
What could be the reason for this differentiated flow picture? A quick look at the YTD (year-to-date) performance provides a possible answer. Our top outflow candidates—XLV, XLK, and XLF—all touched fresh YTD highs last week. In contrast, XLI and XLE traded well below their highs for the year. This illustrates the same important “capital rotation” argument that we examined by comparing QQQ to SPY in Part 2 of this series. Investors seem to use rallies as an opportunity to sell, while moving capital into ETFs that don’t trade at YTD extremes.