With today’s gain of 0.6% (at this writing), the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services exchange traded fund, is up 3.7% since the start of the second quarter.
That is merely the tip of the iceberg with financial services ETFs. Just over 40 ETFs have hit 52-week highs today, 10 of which are financial services funds. Problem is many investors, including plenty of professionals are missing out on the current upside being delivered by financial services ETFs.
“We noticed something VERY interesting after getting an opportunity to analyze the first quarter 13-F filings for US equities that were released on Friday. In fact, it was not that hard as it was staring us straight in the face,” said Rareview Macro founder Neil Azoous in a note out Tuesday. “Broadly speaking there was a VERY clear agenda by US real money and hedge fund institutions to reduce their exposure to the financial sector, to Consumer Discretionary to a lesser degree, and to significantly increase exposure to Healthcare. That fundamentally makes sense when you look at the impact to financials from the flattening of the yield curve in the first quarter or the amount of M&A in healthcare.”
Data confirm Azous’ assessment regarding the departure from financials to healthcare. Year-to-date, XLF has bled $3.52 billion in assets while the Health Care Select Sector SPDR (NYSEArca: XLV) has seen inflows of $1.12 billion. [Getting Strategic With Sector ETFs]
First-quarter 13-F’s show 63 funds created new positions in XLF, but 75 eliminated XLF stakes while nearly 220 professional investors pared XLF positions, according to Whale Wisdom.
The situation is not much better for suddenly resurgent regional bank ETFs. During the first quarter, 35 funds started positions in the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF while 58 added to existing KRE stakes. However, 47 funds closed KRE positions while 72 pared investments in the ETF, according to Whale Wisdom.
Through May 18, investors pulled $414 million from KRE this year, but that has not prevented the ETF from climbing 6.6% over the past 90 days to a new 52-week high today. An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of regional banks. KRE’s holdings have an average beta of +0.44 to moves in the US 10 Year Treasury. [Resurgent Regional Bank ETFs]
KBW Bank Index
Chart Courtesy: Neil Azous, Rareview Macro
Todd Shriber owns shares of XLF.