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4 Sector ETFs Brimming With Inflows

Sanghamitra Saha
U.S. crude dropped for the 12th consecutive session, marking the longest losing streak on record since 1983.

The present investing scenario across the globe has turned a bit tricky. The U.S. economy is better-positioned, while several other developed economies are lagging. Due to upbeat economic fundamentals, the Fed has embarked on a tighter monetary policy, which in turn has resulted in a stronger dollar and rising Treasury bond yields. Such Fed moves have weighed on emerging market currencies as well as economies.

Meanwhile, there has been an acute political crisis in Turkey due to worries surrounding president Tayyip Erdogan's influence over monetary policy and the country’s a worsening relationship with the United States. The problem is so deep-rooted that it has rattled the global investing world.

As a result, investors yanked money from both stock and bond funds in the past week, and piled that in U.S. equities from safe sectors. Per Bank of America Merrill Lynch, about $3.6 billion was pulled out from equity mutual funds and ETFs, of which $2.6 billion was U.S. equities, as quoted on CNBC.

Thanks to rising rate concerns, investors had to dump government debt. There were net outflows of $1.5 billion from Treasuries and government bonds marking “the biggest since December 2016.” Investors also got rid of gold, which is down $500 million due to a jump in the U.S. dollar.

Fund Managers Overweight on U.S. Equities

All these outflows happened when monthly fund managers’ survey indicated the biggest U.S. equity overweight since January 2015, as quoted on CNBC. Now the question is where did all the money go?

According to Bank of American Merrill Lynch (BofA), some sectors scored high in the past three months, in terms of inflows and all of those were defensive.

Why Defensives Rule?

The past three months were all about trade tensions mainly between the United States and China, Turkey crisis, uncertainty pertaining to central banks’ decisions and emerging market currency crisis. Naturally, investors sought shelter under safe havens. 

Health Care Select Sector SPDR Fund XLV

Health-care stocks hauled in $800 million, leading the sector to see a total of $5.5 billion in inflows for the past three months. The S&P health-care sector has been the top performer so far this quarter. The fund amassed about $872.20 million in assets and was up about 9% past three months (as of Aug 17, 2018).

The U.S. health care supply chain is consolidating fast, with deals across the industry ranging from insurers, pharmacies to drug distributors. Plus, President Trump’s announcement of the drug plans in May was in the best interest of pharma companies (read: Health Care ETFs Outperforming: Will the Rally Last?).

Consumer Staples Select Sector SPDR Fund XLP

The fund added about $1.15 billion in assets in the past two months (as of Aug 17, 20218). Trade tensions and Turkey crisis boosted this non-cyclical consumer sectors.  The fund has been up 10.7% in the past three months too (read: Wal-Mart Blockbuster Q2 Earnings Pushes Consumer ETFs Higher).

Utilities Select Sector SPDR ETF XLU

This is yet another safe sector. Investors have dumped about $420.04 million in assets in the past two months (as of Aug 17, 2018). The fund is also known for high yields. If has offered benchmark-beating yields of 3.22% over a year as of Aug 17, 2018. The fund has added about 10.7% in the past three months.

Vanguard Real Estate ETF VNQ

The sector underperforms in a rising rate environment. Yield-hungry investors normally have a large appetite for REIT stocks as the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. As a result, in a rising rate environment, the appeal for this yield gets quelled.

Still the fund added about $646.7 million of assets in the past two months (as of Aug 17, 2018) and has gained about 9.5% in the past three months. This shows investors’ inclination for the safe sectors. After all, an improving U.S. economy should bode well for real estates. The fund yields about 4.23% annually. 

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