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.