Rather than solely relying on broad market index exchange traded funds to generate returns, an increasing number of advisors, ETF strategists and investors are tactically using sector funds. Data confirm as much.
In March alone, investors poured $1.5 billion into financial services ETFs and nearly $1.9 billion combined into technology and materials ETFs. Last week, Charles Schwab (NYSE: SCHW) said 20% of first-quarter inflows to ETFs by its clients were directed to sector funds. Financial services, health care and technology sector ETFs remained popular with Schwab clients while the firm also noted an uptick in flows to real estate investment trust ETFs. [ETF Assets at Schwab Rise Again]
“During the recent market expansion, investors and advisors put roughly $3 billion of fresh money each month into U.S. sector ETFs regularly and that trend has continued into this year. We believe they are using sector products to make tactical decisions on what areas of the market they think will be the leaders,” said S&P Capital IQ in a new research note.
Earlier this year, S&P Capital IQ highlighted Main Management’s top-down view on macroeconomic factors, which facilitates increased “exposure to U.S. sectors where it sees appealing valuations and key fundamental drivers,” according to the note. [Rotating With Sector ETFs]
Main’s sector strategy can allocate to a sector up to two and a half times the group’s weight in the S&P 500. At the start of the year, Main held positions in the Technology Select Sector SPDR (NYSEArca: XLK), which was complemented by a stake in the Market Vectors Semiconductor (NYSEArca: SMH). Both ETFs are heavily allocated to more mature tech names and lack significant exposure to the Internet and social media sub-sectors, the groups that have recently been a drag on the broader market. [Semiconductor ETFs Avoid Tech Slump]
Main also held a position in the Financial Select Sector SPDR (NYSEArca: XLF), the largest U.S. sector ETF, and the iShares US Broker-Dealers ETF (NYSEArca: IAI). Although the latter has taken its lumps recently in the wake of increased attention on high frequency trading, XLF has been one of the most prolific asset gathers among sector ETFs this year. S&P Capital IQ rates XLF overweight and IAI marketweight.