Sector Flows: Should Equity Bulls Be Worried?



Confirming risk aversion

GICS sector ETF flows largely confirmed investor risk aversion and the increasing selectivity that we discussed in Part 1 of this series. In total, GICS sector ETFs attracted ~$200 million in net inflows, but significant differentiation between defensive and cyclical flows was evident. The chart below illustrates this point.

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Inflows: Low-beta exposure favored

Inflows into GICS sector ETFs totaled ~$700 million last week. More importantly, ~60% of these flows were allocated into the three sector ETFs with a five-year beta to SPY below 1. In other words, investors preferred less volatile exposure. Among the more defensive sector ETFs, the Utilities Select Sector SPDR Fund (XLU) saw the largest inflows. This fact is quite telling, as the ETF has a beta to SPY of ~0.4—the lowest among GICS sector ETFs.

Weekly performance was supportive, as XLU jumped ~1.4%, trading near its all-time high. The Health Care Select Sector SPDR Fund (XLV), with a beta of ~0.6, ranked third in terms of inflows, closely followed by the defensive Consumer Staples Select Sector SPDR Fund (XLP).

Outflows: Capital leaves cyclical and high-beta ETFs

Investors pulled ~$500 million of cash out of four GICS sector ETFs last week. Notably, all the ETFs that witnessed outflows are high-beta in nature. This pattern goes hand in hand with the theme of risk reduction among investors—even as US equities continued to rally.

The Consumer Discretionary Select Sector SPDR Fund (XLY) saw the most outflows, followed by the Technology Select Sector SPDR Fund (XLK). Interestingly enough, the two ETFs posted some of the largest weekly gains, which suggests that market participants are using rallies in riskier ETFs as a selling opportunity.

On the whole, the preference for defensive over cyclical sectors from a flow perspective starkly contrasts with the preceding week‘s capital allocation. While equity bulls shouldn’t necessarily panic, it may be wise to follow the rotation into low-beta sector ETFs closely.

In Part 3 of this series, we broaden the scope of our analysis to the entire ETF universe.


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