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GICS Sector ETFs: Investors Run for the Exits!

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GICS Sector ETFs

During last week’s volatile trading session, investors pulled money out of all but two US GICS Sector ETFs. All of the sectors closed in negative territory. Leading the list of the “most-out-of-favor” sectors was the Financial Select Sector SPDR Fund (XLF) with an outflow of $350 million. It’s often the case during a sell-off, most cyclical sectors were next on the list including the Consumer Discretionary Select Sector SPDR Fund (XLY). Another usual suspect was the Energy Select Sector SPDR Fund (XLE). It fell out of favor again.

Let’s look at two specific candidates.

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Financials’ performance starts to follow flows  

Since the US equity market made its YTD (year-to-date) lows on February 11, XLF has rallied 15%. A little-known fact—since this date, some $800 million has been pulled out of the ETF. This is the largest outflow among all of the GICS Sector ETFs. Looking at these flows on a YTD basis, the picture becomes somewhat terrifying—$2.5 billion left the ETF, while the fund is only down slightly on the year.

However, this contradictory picture might come to an end. The last two weeks of outflows coincided with alarming signs for financials on various levels. First, voices from the Fed became louder last week that another interest rate hike may not be in the cards anytime soon. St. Louis Fed president Bullard was arguably the most dovish voice. He suggested that only one rate hike might be needed through 2018. Second, the demand for out-of-money puts, especially in the 5%–10% range, increased much more than the demand for out-of-money calls since XLF’s highs at the end of May. This suggests that investors are starting to hedge long positions in the ETF or are taking downside bets. Third, the technical upward trend seen since the February lows is clearly broken. It was confirmed by a double-top at the $24 level and a break through the 50-day and 200-day moving averages. Naturally, more pain is felt below the surface. Similar factors weighed on bank ETFs such as the SPDR S&P 500 Bank ETF (KBE) and the SPDR Regional Banking ETF (KRE). Not to suggest any downside trades, but the largest outflows seen on various time horizons are now also being confirmed by “Fed-speak,” option demand, and the technical picture.

Technology was hit hard 

The Technology Select Sector SPDR Fund (XLK) was the only GICS Sector ETF that saw somewhat significant inflows of ~$80 million. At the same time, it was one of the ETFs that was hit the hardest. It closed the week 2.1% lower. What could this mean? First, let’s acknowledge that much of the decline was caused by a few heavyweights including Apple (AAPL), Alphabet (GOOGL), and Facebook (FB). Together, they account for close to 25% of XLK’s portfolio. Second, the declines were caused by headlines that might be distant history soon. This included a ruling that barred Apple’s iPhone 6 and iPhone 6 Plus in Beijing. Considering that investors didn’t capitulate, but rather poured more money into the ETF on this weakness, it suggests that the pullback could be short-lived.

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