So far in July investors are shoveling cash into U.S. stock ETFs at the fastest pace in several years. Sector ETF purchases show they are adding risk by gravitating to industries that stand to benefit the most from an accelerating economy and rising interest rates.
“Investors are favoring some cyclical sectors that could be rewarded in this market environment,” said David Mazza, head of ETF investment strategy at State Street Global Advisors.
State Street manages the popular ETF lineup of sector SPDRs.
This month, the top-selling ETFs in the family are Financial Select Sector SPDR (NYSEArca: XLF), Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) and Technology Select Sector SPDR (NYSEArca: XLK).
Additionally, the small-cap iShares Russell 2000 (NYSEArca: IWM) has seen hefty inflows this month. Investors tend to favor small-cap stocks when they are adding risk and expect the economy to pick up. [Stock ETF Buying Spree Reflects ‘Great Rotation’]
“Historically, stock performance during early cycles is dominated by financials and consumer discretionary, which are the most credit-sensitive sectors. In addition, lower quality and smaller companies tend to outperform because they are typically more sensitive to changes in the economy,” according to a Richard Bernstein Advisors paper.