iShares: Investors Selecting Cyclical Sector ETFs

May 30th at 11:36am by Dodd Kittsley -- iShares

Whiplash: It’s one of the occupational hazards of my job.  As a team that’s tasked with analyzing exchange traded product (ETP) flows, my colleagues and I spend a lot of time sorting through data in an effort to identify investment trends.

But, as you can probably imagine, sometimes these trends can turn on a dime – making it difficult to differentiate between short-term “moods” and long-term “movements.”

Sector ETP flows are usually a good example of this, since sector investors tend to be a more tactical group to begin with. [An ETF for Dividends and the Cyclical Rotation]

But the recent shift away from defensive sector funds and into cyclical ones has been significant enough to give us pause.  Classic defensive sectors like healthcare, utilities and consumer staples  – year-to-date leaders in sector ETP flows – have all seen a downward trend so far in May, bringing the whole defensive category down with them.

Meanwhile, cyclical sectors like financials and basic materials saw a brief downturn in April before making a strong recovery in May (see below).

Of course, this is still a relatively short period of time – perhaps too soon to call a “great sector rotation” out of defensives and into cyclicals.  But there are signs that this could be more than just a blip. If defensive sectors continue to suffer from historically high valuations and declining performance, more outflows are to be expected.  In addition, as investors become increasingly comfortable with risk and more confident in the economy, they should naturally gravitate away from the relative safety of defensive sectors and toward the potential outperformance of the riskier cyclical category.

Also supporting the sector rotation theory is the fact that sector ETP investing in general is on the rise.  Year-to-date, US listed US sector ETPs have gathered $17.4 billion in net new assets – twice what they accumulated last year during the same timeframe at $7.7 billion.  In fact year-to-date 2013 inflows beat 2012 annual inflows at $17.0bn. This suggests that more investors are feeling positive about the market and want to express their views through sector selection.

Only time can tell if this sunny outlook will last, but you can bet our team will be keeping an eye on it – whiplash or not.

Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock.

Tickers