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Stock ETF Buying Spree Reflects ‘Great Rotation’


The so-called Great Rotation is on, at least in ETFs, as investors shift to U.S. stocks and away from bonds, which have enjoyed a three-decade rally.

“Investors have been pouring money into ETFs this month, shrugging off concern that the Federal Reserve is poised to slow stimulus. About $27.9 billion was sent to American share ETFs this month, about four times the amount deposited last month and the most in almost five years,” Bloomberg reports.

So far in July, investors have pumped more than $11 billion into SPDR S&P 500 ETF (SPY) alone, according to IndexUniverse flow data. [Investors Chase Rally with S&P 500, Nasdaq-100 ETFs]

They have added $2.6 billion to the small-cap iShares Russell 2000 (IWM) this month, while PowerShares QQQ (QQQ) has gathered $1.8 billion and Financial Select Sector SPDR (XLF) has reeled in $1.2 billion. [XLF Sets Sights on Japan ETFs for Flows Crown]

“If you are looking for the source waters of the recent melt-up in U.S. stock markets, look no further than U.S. listed exchange traded funds,” says Nicholas Colas, chief market strategist at ConvergEx Group. [Investors Pumping $2 Billion a Day Into U.S. Stock ETFs in July]

However, Michael O’Rourke, chief market strategist at JonesTrading Institutional Services, isn’t convinced that ETF money is driving the market, WSJ.com’s MoneyBeat blog reports.

Specifically, he said ETFs aren’t big enough in terms of assets to influence the stock market.

“How much these flows drive overall market performance is debatable,” O’Rourke said in the MoneyBeat post.

Still, ETFs have seen impressive growth. For example, the small-cap IWM as climbed 24% this year and has seen its market cap grow 65%. XLF, the financial sector ETF, has climbed 27%, and its market capitalization had grown by 85% this year.

“O’Rourke thinks these flows reflect investors bailing out of bonds after the spring selloff and chasing performance in the hottest corners of the stock market,” according to the report.

“Capital does not chase value, it follows performance, and stocks had been winning for too long to continue to escape notice,” writes Josh Brown at The Reformed Broker blog on the recent shift to equities from bonds. “Once the bonds started looking shaky, it had become a fait accompli.

Full disclosure: Tom Lydon’s clients own SPY, IWM and QQQ.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.