International exchange traded funds are widely credited with driving $18.3 billion of new assets into ETFs last month, but some sector funds proved to be prolific asset gatherers as well.
“Investors showed a lot of enthusiasm for financials, which saw about $4.9 billion in new funds globally, or 32% of all equity inflows (FIGURE 1). That’s far larger than the sector’s weight in either the SPDR S&P 500 ETF (NYSEArca: SPY) at 16%, or even the iShares MSCI ACWI ETF (NasdaqGM: ACWI), with a 21% allocation,” according to AltaVista Research.
ETF investors responded to ongoing speculation that the Federal Reserve is drawing closer to raising interest rates by embracing financial services ETFs in May. For example, the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, added nearly $545 million in new assets last month. Inflows to financial services ETFs, including XLF, arrived after professional investors shunned the sector in the first quarter. [Pros Ditched Bank ETFs too Soon]
The rate-sensitive SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, captured $243.4 million in new investments last month while the SPDR S&P Bank ETF (NYSEArca: KBE) gained $89.5 million in fresh capital. KBE is not a dedicated regional bank ETF, but the fund allocates 77.5% of its weight to regional banks.
Bank valuations are also back up. Looking at price-to-book multiples, the most popular measure for valuing the sector, U.S. banks of the KBW banks index are trading near fair value at a 16% premium to book value, or about the same valuations in the summer of 2008. The sector has shown it is capable of trading a even higher valuations of three or even five times book value, but banks are unlikely to return to the late 199s levels. [Muted Bank ETF Expectations]
The May flows to bank ETFs are interesting when accounting for seasonal trends, which highlight June weakness for the financial services sector. On a historical basis, XLF is the worst of the nine SPDRs in the sixth month of the year.
Healthcare ETFs captured 15.1% of sector fund inflows last month, according to AltaVista data, with the Health Care Select Sector SPDR (NYSEArca: XLV) adding almost $590 million. According to Lipper data, the average active large-cap equity fund now includes about 15.8% healthcare stocks, their highest tilt in three years.
The healthcare sector is expected to make up 19.9% of U.S. gross domestic product by 2022 from 17.1% in 2013, according to the Office of the Actuary at the Centers for Medicare and Medicaid services. A recent TD Ameritrade survey shows ETF investors across nearly all age groups have boosted healthcare exposure in recent years and that older investors in particular are increasing their healthcare ETF allocations. [Boomers, Millennials Love ETFs]
Chart Courtesy: AltaVista Research
Tom Lydon’s clients own shares of SPY. Todd Shriber owns shares of XLF.