With the conversation about a Federal Reserve interest rate increase having morphed to “when” from “if,” cyclical sectors should begin to prove their mettle. Data indicate some investors are already making that bet.
Exchange traded funds hauled in $36.1 billion in new assets last month, bring the first-quarter total to $97.2 billion, or nearly triple the total from the first quarter of 2014. While international equity ETFs, mainly currency hedged funds, accounted for the bulk of those flows, cyclical sector ETFs were solid asset gatherers in March as well. [ETFs Add $36.1 Billion in March]
“At the sector level, the cyclical trade has taken hold in the consumer segment as Discretionary far outpaced Staples ($3.4 billion of inflows and $2.3 billion of outflows, respectively). Health Care remains in favor, with nearly $3 billion of inflows, while Utilities, a favorite in 2014, saw $1.7 billion in outflows amid concerns surrounding rising rates,” according to State Street Global Advisors.
Rising rates fears have helped drub the Utilities Select Sector SPDR (NYSEArca: XLU), sending the largest utilities ETF to year-to-date loss of nearly 5%. That makes XLU the worst performer of State Street’s nine sector SPDR ETFs after it was the best performer last year. Investors pulled $1.75 billion from utilities ETFs last month, according to State Street data.
Cyclical sector ETFs, namely consumer discretionary and technology funds, are helping ameliorate departures from staples and utilities funds. In March consumer discretionary ETFs added a combined $3.38 billion in new assets while investors allocated $1.81 billion to tech ETFs, according to SSgA data.
The Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) entered Monday with a 5.3% year-to-date gain, good for second-best among the nine sector SPDRs, trailing only the Health Care Select Sector SPDR (NYSEArca: XLV).
Walt Disney (NYSE: DIS) and Home Depot (NYSE: HD) are two of just seven Dow stocks up at least 5% this year and that is good news for XLY because those stocks are the ETF’s two largest holdings combining for 13.6% of the fund’s weight. [Discretionary ETF Shines]