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Cash Floods Into Financial, Bank ETFs

tlydon@globaltrend.com (Tom Lydon)

Financial sector ETFs continue to demonstrate impressive relative strength and leadership with Financial Select Sector SPDR (NYSEArca: XLF) rallying 20.92% year to date versus the S&P 500 Index up 11.31%.

Financials, which have been a market leader as we have noted throughout the first quarter in 2012, were also among the leaders in net creation activity last week as SPDR S&P Bank ETF (NYSEArca: KBE) attracted nearly $400 million in new assets and XLF took in nearly $300 million. There is some degree of overlap in the two products as Bank of America (NYSE: BAC - News) is a prominent weighting in both, and KBE has more of a regional banking focus whereas XLF has significant exposure to “money center” banks as well as diversified financial services equities including BRK.B. From a benchmark standpoint,

Equities worked their way lower for most of the week following Monday’s intra-day high of 1414.00 in the SPX (which is also a new multi-year high) until a mid-day rally took place last Friday. Our market technician David Chojnacki recently noted that we currently have mixed technical signals in the major averages (DJIA, NDX, SPX) which will likely result in “choppy or side-ways action in the near term.”

On the SPX, upside technical resistance lies at 1412 and 1425, but there is interim support at 1388 and 1375, and the SPX bounced off of 1388 and ran higher on several occasions last week. Volumes were below average for the most part last week in equities, and despite the weakening from recent highs, the VIX remains near recent lows, closing at 14.82 on Friday and it has spent 12 consecutive trading days now below its 50 day moving average.

Directional options flows were relatively light last week as well, with some scattered put buying in broad based products such as SPY on occasion last week as well as specific sector ETFs including XME, XOP, XLI, and XLB for example late last week, but again, there was no real compelling evidence of institutional options players taking an outright bullish or bearish stance on anything in the near term via observable options activity.

Despite the VIX continuing to toil at recent lows and related “Long VIX” ETNs and ETFs suffering accordingly, the leader in inflows last week via creation activity was iPath S&P 500 VIX Short Term ETN (NYSEArca: VXX), which took in close to $600 million. We note that VXX has traded huge volumes in the past several sessions, with a number of 50 million share plus trading days versus average daily volume of about 28 million shares.

Relatively obscure Barclays S&P Veqtor ETN (NYSEArca: VQT ) which seeks to establish a volatility hedge for investors by dynamically allocating across three asset classes, equity, volatility, and cash, also saw considerably activity last week and reeled in nearly $200 million in new assets on heavier than average volumes.

Perhaps the biggest story of last week was VelocityShares Daily 2X VIX Short Term ETN (NYSEArca: TVIX ) which traded huge volumes and sold off sharply beginning on Thursday of last week, even though the official news that Credit Suisse, the bank securing the ETN, was reinstating creations in the product only hit on Thursday night well after the close. [What Happened with TVIX]

Volumes were literally off the chart in TVIX, which had previously traded like a Closed End Fund for the past several weeks, on both Thursday and Friday as the “premium” that has existed in the product ever since creations were suspended weeks ago by Credit Suisse vanished in short order, as arbitrageurs, institutional funds, and institutional trading firms aggressively became involved in the product once again moving it back in line relative to other “long VIX” products.

We highlighted the presence of “Treasury Bond Bears” in recent recaps as well, and this trade was prevalent once again last week as ProShares UltraShort 20+ Year Treasury Bond (NYSEArca: TBT) was one of the leaders in asset inflows, taking in over $250 million in new assets via creations. Recall that we had mentioned size call buying in TBT, increased trading activity in related leveraged bearish ETF, Direxion Daily 20 Year Plus Treasury Bond Bear 3X (NYSEArca: TMV) , and large put buying in iShares 20+ Year Treasury Bond (NYSEArca: TLT) in the past few weeks and Treasury Bonds largely collapsed (prices fell sharply and yields rose) two weeks ago following the recent Fed rate decision.

Treasuries were bid up once again last week however, as TLT rose throughout the latter part of last week, finding significant support on its 200 day moving average, but the larger creation activity in TBT last week gives us some indications that the “Treasury Bond Bears” are still in the picture and are using the recent reversal in treasury prices as an opportunity to add to short positions.

In related activity, TLT was among redemptions leaders last week, with the fund losing about $170 million to outflows, and iShares Investment Grade Corporate Bond (NYSEArca: LQD) saw about $200 million leave the fund.

In sector ETFs, Technology Select Sector SPDR (NYSEArca: XLK), with its largest holding being Apple (NasdaqGS: AAPL - News) at 17.68%, also was among asset inflows leaders last week, seeing $150 million flow into the fund. AAPL is also the highest weighting in QQQ, at 15.65% and this ETF also saw heavy creation activity last week, with more than $300 million flowing into the fund. Technology continues to outpace the broad market in this first quarter of 2012 as well, with XLK rallying 17.83% thus far.

It seems feasible that there may be some “window dressing” occurring into these final days of the first quarter based on observable creation activity in Financial and Tech ETFs, being the performance leaders thus far in 2012 and managers funneling more cash into these winners in the past several sessions to ideally end the quarter on a high note. From an outflows standpoint, SPY led the way on the redemptions side, losing about $3 billion in assets last week, and sector specific funds were also active including XLI and XLB which lost about $500 million collectively last week.

SPDR Midcap S&P 400 (NYSEArca: MDY) also saw substantial redemptions, losing more than $350 million.

Finally, on a week that saw the U.S. Dollar fall rather sharply versus the Euro, with PowerShares U.S. Dollar Index Bullish (NYSEArca: UUP) falling below its 50 day moving average and trading at its lowest levels since early March, ETF flows suggest that institutions are using this drop to add to UUP exposure and cashing out of CurrencyShares Euro (NYSEArca: FXE) into the rise in the currency last week. UUP saw net creations of about $160 million whereas FXE saw nearly $200 million vacate the fund.

Also on the currency front, the Japanese Yen was rather active last week as well, as CurrencyShares Japanese Yen (NYSEArca: FXY) reversed course from its recent slide and bounced notably from one year lows, finishing the week on a high note and closing at $119.36. Nonetheless, more than $75 million left the ETF via redemptions last week despite this reversal in price action, equivalent to about 25% of the assets outstanding in the fund.

For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.