Skip to main content
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week
for 24 weeks
// //

ETFs linked to sectors that tend to perform well in tougher environments – health care, consumer staples and utilities – have attracted net inflows of almost US$5-billion in July.

eldar nurkovic/iStockPhoto / Getty Images

Billions of dollars have flowed into “defensive” exchange-traded funds (ETFs) in recent weeks, highlighting the jitters arising in some corners of Wall Street after U.S. stocks have set a series of record peaks.

The resurgence in COVID-19 infections in some U.S. states, evidence of rising inflationary pressures and concerns that the U.S. Federal Reserve Board will soon start to scale back its vast asset purchasing scheme have already prompted some investors to adopt a more cautious stance.

U.S. stocks came under selling pressure this week, with the S&P 500 pulling back. On Tuesday, the fall came after a round of disappointing data on U.S. retail sales for July. Then, the index dropped 1.1 per cent on Wednesday, its worst day since mid-July, after minutes from Federal Open Market Committee’s most recent meeting revealed that a majority of Fed officials believed the withdrawal of the stimulus program could start later this year.

Story continues below advertisement

Investors have been weighing whether the rapid spread of COVID-19 and lower levels of government stimulus payments will begin affecting consumption, which accounts for about 70 per cent of the U.S.’s economic output.

The S&P 500 still remains up about a fifth for the year to date, having doubled from the lows hit during the market tumult of March 2020. At the same time, the index has gone almost 200 trading days without a 5 per cent pullback, according to Bank of America, one of the longest such streaks in the past half-century – a tranquil grind higher that has added fuel to a shift under the market’s surface.

ETFs linked to U.S. defensive sectors that tend to perform well in tougher environments – health care, consumer staples and utilities – together attracted net inflows of almost US$5-billion in July after registering combined outflows of US$3.6-billion in the first half of 2021, according to State Street Global Advisors.

“The inflows in July went mainly into defensive sectors. That has continued into August with health care and utilities sector ETFs both taking another US$1-billion each in inflows so far this month,” says Matthew Bartolini, head of SPDR Americas research at State Street.

In contrast, ETFs linked to more economically sensitive U.S. sectors – financials, materials, industrials, consumer discretionary, energy and real estate – all registered outflows in July that totalled US$7.2-billion. These six cyclical sectors had together gathered US$57-billion in the first half of the year.

Mr. Bartolini says evidence of a “bullish but worried” mood among investors was also evident in flows for smart beta ETFs, which aim to exploit long-term mispricings. ETFs that focus on so-called quality stocks with reliable earnings grabbed inflows of US$21-billion in July after posting outflows of US$3.8-billion in the first half of 2021.

Momentum ETFs, which buy equities with positive recent price trends, registered outflows of US$856-million in July, almost wiping out the inflows of US$1.1-billion gathered over the first six months of this year. Value ETFs, which buy underpriced stocks that tend to do well in periods of strengthening economic growth, notched outflows of US$1.4-billion last month after taking in US$12.8-billion in the first half.

Story continues below advertisement

Scott Chronert, an analyst at Citigroup in New York, says the economic recovery trade which ETF investors favoured in the first half of the year “seems to have lost its lustre” with a “more risk-off bias” evident in ETF flows in July.

U.S. equity ETFs have registered inflows of about US$250-billion so far this year, providing fuel for the S&P 500′s record run. With the main U.S. equity benchmark hitting a fresh all-time high this month, more investors are questioning just how much further the rally can run.

“Clients have felt there is nowhere else to go but into equities because bond yields are so low. But we are recommending that clients move to a more defensive position because returns from equities are likely to be lower and more volatile in the second half of the year,” says David Jones, a strategist at BofA in New York.

A BofA survey of fund managers with US$702-billion in assets under management highlights these concerns: expectations that the world economy will continue improving slumped in August to the lowest level since April 2020.

Earnings for the second quarter, which exceeded analysts’ expectations, were reported by 391 constituents of the S&P 500 by Aug.11, according to Citigroup. Just 55 companies on the S&P 500 have reported earnings disappointments so far for the second quarter.

Tobias Levkovich, Citigroup’s chief U.S. equity strategist, says U.S. companies had delivered “shockingly good” results. However, investors are growing more anxious about whether U.S. groups can meet the high bar set in the second quarter. The BofA fund manager survey indicated optimism over corporate earnings had eased, while investors now expected profit margins to decline – something they had not forecast since last summer.

Story continues below advertisement

“Few [investors] think there is anywhere to go with new money other than to equities at this juncture. [But] we suspect that the combination of higher U.S. taxes, potentially more persistent inflation, Fed taper talk and possible margin compression all support the probability of a correction,” Mr. Levkovich says.

© The Financial Times Limited 2021. All Rights Reserved. FT and Financial Times are trademarks of the Financial Times Ltd. Not to be redistributed, copied, or modified in any way.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies