Sector Rotation Favors Riskier ETFs

February 7th at 12:15pm by John Spence

Buying and selling patterns in sector exchange traded funds provide more evidence that investors are taking on more risk and chasing the stock rally in 2012.

For example, investors are shying away from ETFs tracking more conservative sectors such as utilities and healthcare, and moving into riskier areas of the market such as financial stocks.

Consumer Staples Select Sector SPDR (NYSEArca: XLP) and the Utilities Select Sector SPDR (NYSEArca: XLU), which both maintain volatility metrics far below the S&P 500, gave up $989 million and $617 million last month, respectively,” Morningstar analyst Abraham Bailin wrote in a report Tuesday. “Flows to these sectors have steadily broken down over the past five months, while over the same time frame, flows to the riskier financials and industrials sectors have become increasingly positive.” [Investors Rotate Away from Utilities ETFs]

Financial Select Sector SPDR (NYSEArca: XLF) took in $757 million of inflows in January. [Worst to First: Financial, Materials ETFs Lead Market]

Overall, nearly $29 billion flowed into U.S.-listed ETFs last month – a record for January – despite lower trading volume. [Why is ETF Trading Volume Down?]

“Of January’s $28.5 billion inflow to U.S. ETFs, the largest share was claimed by the U.S.-stock asset class. U.S.-stock ETFs rallied $13.4 billion last month and, in a show of strong risk-on sentiment, heavily targeted the financial and industrial sectors,” Bailin wrote.

Also, heavy inflows in emerging market and high-yield ETFs points to the risk-on trade. [Investors Tapping ETFs to Position for Higher Markets]

Separately, investors are moving into gold ETFs in early 2012. Gold prices were rallying Tuesday as Federal Reserve Chairman Ben Bernanke testified before the Senate Budget Committee.

SPDR Gold Shares (NYSEArca: GLD) rallied $922 million last month and iShares Gold Trust (NYSEArca: IAU) picked up $276 million. Together they account for more than 80% of January inflows to the commodities asset class. Prompted by inflationary fears and a search for diversification in the wake of the downturn, interest across the broad commodities space has increased substantially over the past several years,” Morningstar’s Bailin noted.

“Commodities have not been immune to the recent pervasive risk-on/risk-off investing sentiment, and correlations have increased substantially,” the analyst added. “Gold, it seems, has been the exception to this trend. As it stands, correlations of the shiny yellow metal to the broad equity space are near zero.”

SPDR Gold Shares


Full disclosure: Tom Lydon’s clients own GLD.

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.